April 20, 2003

While World Bank and IMF fiats have time and again proved to be ineffective, the theory of trickle-down effect is the biggest fallacy of them all. Only a home-grown solution can ensure sustained economic growth

In the midst of plethoric plenty, the poor perish.— Thomas Carlyle

OUR foreign exchange reserves will soon be touching the $11 billion mark. After the 9/11 incident, rescheduling of our loans and some write-offs have also reduced our debt burden. Exchange rate is apparently stabile, and the $10 billion export target is likely to be achieved as well. How much of these surpluses have been earned, how much are gifted, or are the result of some windfall, is for everybody to guess. But does this whole stabilization process provide any hope to those hit by rampant poverty which has now touched the 34 per cent mark?

During the last couple of years, our economic managers have been telling us that once macroeconomic stability is achieved, problems of increasing poverty will be tackled or, at least, its intensity will come down automatically. While the majority of the poor is still waiting for that day with bated breath, there are, or were, those who lost that hope and, out of frustration, committed suicide. If newspaper reports are anything to go by, others are following suit at an alarming rate.

The question is, do the policy-makers in Pakistan understand the causes of high incidence of poverty? Secondly, do they have a vision, a strategy, a road map to address these causes? Thirdly, do they have the capability and the political will to launch policies that can reduce poverty? Unfortunately, right now all these essential ingredients seem to be missing.

In any discussion on poverty reduction, the emphasis remains on dole-outs like zakat, grants from the baitul maal, food stamps, subsidies on essential items, and, to top it all, micro-credit through the newly-created Khushali Bank. Full stop.

But even a lay person understands that these steps cannot provide succour to over 46 million poor people. Micro-credit may be necessary, but in no circumstances it can be a sufficient step to alleviate poverty. Even the Grameen Bank of Bangladesh, which is known the world over for its pioneering work, has not been able to make any substantial dent in poverty, although it is operative since 1978.

The same applies to food stamps and subsidies. In most cases, they hardly reach the target groups. Even the Khushal Pakistan Programme has limited impact, like its predecessors Tameer-e-Watan and Peoples’ Works Programme etc., because of the magnitude of the problem.

Our economic wizards tell us that upto 1990 we made strides in economic development. They quote doubling of per capita income, and four-fold increase in food production during this period as indicators of development. According to them, the very fact that we are able to feed our population (which, by the way, increased from 35 million to 120 million during the period) is a great achievement.

Other senior bureaucrats, while agreeing with this perception, further add that high incidence of poverty notwithstanding, the prosperity of our middle classes, the number of cars on our roads, the housing improvement in the cities, the number of shopping malls, the increasing consumption of meat, eggs and milk, indicate that we have come a long way from poor living conditions of four decades ago.

They also say that since 1947 a large number of people have done a lot better. More children are going to schools, more people can afford to have medical cover, more and more people have telephones, televisions, refrigerators, even dish antennas in their homes.

Some overly patriotic people also point out our nuclear capability, our military strength, and the establishment of a few centres of excellence. They say that in spite of our many failures in the political field, we have after all succeeded in laying the structure of a modern state, and provided a strong base for industrialization.

But there are independent economists and social scientists who say that these signs of prosperity are at best superficial. They argue that we should not take pride in loan-based development which has made the country hostage to international financial institutions. They are more concerned with quality of life for the teeming millions. They admit that we have more cars on our roads, no doubt, but what is the condition of our roads? As an indicator of continuing poverty, they refer to the caloric intake and consumption of cloth per capita which has not changed much since 1947.

They say if anyone wants to verify the real condition of the urban poor, he should go to the OPD of any government-run facility in any big city, and see how under-nourished and ill-clothed the people are. And, of course, the patients are there mostly because of diseases caused by the absence of sewerage, and the lack of potable water.

In support of their argument, they point out that 67 million people are still without piped water, whereas 89 million have no sewerage worth its name. They add that in urban centres, as much as 70 per cent of the economy is ‘informal’ and, in addition to providing much-needed services, it provides millions of jobs. Imagine what would have happened on the employment front, if the people had not taken the initiative.

Extreme poverty in rural Sindh and Balochistan is a matter of great concern even for the World Bank. Certain areas in Punjab, NWFP and Sindh have, no doubt, done better, but what about the landless, the daily-wagers? One may accept the low inflation rate, but no one talks about those who have hardly any income or are unemployed. In any case, government methodology in calculating the rate of inflation does not include things like transport, medicines, school fees, rents and utility bills which keep on increasing all the time, while incomes do not.

These opinions can be debated ad infinitum. But most people agree that in spite of apparent and ‘superficial’ ostentatiousness, and conspicuous, at times vulgar, consumption, we have not been able to attack mass poverty as yet. Few would disagree that disparities in income have starkly increased during the last 35-40 years, giving rise to frustration and seething anger, specially among urban youths who have ‘paper degrees’ and are not able to find gainful employment. This phenomenon is largely responsible for the deteriorating law and order situation, as well as the crime pattern.

WHAT HAS GONE WRONG: When Pakistan came into being, we should have started the development process based on what we had. To achieve this objective, the first thing was to collect data and carry out a detailed survey of our existing resources (both in agriculture and small industry) and also the variety of human material available.

The data should then have been carefully analyzed for evolving a long-term vision and developing a homegrown strategy, giving priority to physical and social infrastructure. The second priority should have been given to agrarian reforms based on land distribution amongst peasants, proprietors, landless millions and the haris. Thirdly, we should have ensured the strengthening of local government institutions so that small-sized cities could grow and provide support — both financial and technological — to small-scale engineering goods industry for which we had a good base. Lastly, we should have taken effective and meaningful steps to check population growth.

But we did not pay attention to any of these things. Before partition, the Muslim League had the reputation of being a revolutionary party and had promised drastic land reforms. But perhaps this was the only political party that ‘banned’ its own manifesto as soon as Pakistan came into existence.

Our new rulers, the erstwhile ICS officers, planners and economists behaved in the most superficial manner and stated a visionless, directionless process of modernization, jumping to large-scale industry without having a firm foundation in agriculture. The social sector was starved of funds, with no attention to human resource development. At the same time small-scale engineering industry, was ignored. No technological support was provided to those who wanted to improve and expand their units. Nor any financial support and market research was forthcoming from the state.

The decaying institution of feudalism was not only strengthened, but a new class of absentee landlords was created. The central government became too strong and top-heavy, creating a vacuum at the local level. Starved of resources and technical capability to solve their own problems, our cities and small towns started decaying and their infrastructure crumbled. We can see the result of all these policies today — everywhere in Pakistan. All this has happened in the lifetime of a generation.

Surprisingly, in the same period countries like South Korea, Malaysia, Taiwan and Thailand allowed clear-cut and consistent policies for economic development, and, in a short period of 30 years, became part of the industrialized world. Just one example will illustrate the point. In 1965, our manufacturing exports were worth $200 million, which were equal to the exports of Thailand, Malaysia and South Korea put together. In thirty years, our exports of these items had risen to only $5 billion, while South Korean exports alone had touched the $77 billion mark.

In the late 1950s, Harvard Development Advisory Service Mission, which was strategically located in the Planning Commission, was entrusted with the responsibility of devising the future strategy for Pakistan. They advocated that the industrialists in Pakistan (who in no way were entrepreneurs, but, at best, robber barons) should be provided government support, easy loans, protection from foreign competition, low wages for the labourers in order to increase profit, tax holidays, regular and inexpensive supply of raw material, and reduced duties on import of machinery.

If all this was done, they believed, industrialists would save and re-invest the profits; the rates of saving would sky-rocket; and the country would reach the take-off stage. Having generated finances and having industrialized the country after absorbing the ‘surplus labours’, they thought, the question for income distribution could then be tackled and everybody made happy. This is what the famous, or infamous, theory of ‘trickle down effect’ was all about.

By the beginning of 1970s, however, it had become clear that the trickle down strategy was not working as planned. While aggregate output had indeed increased, development benefits were not trickling down. Unemployment, underemployment, and low productivity remained a serious issue both in rural and urban settings.

When enough jobs were not available locally, the surplus labour began to eye foreign markets. We started exporting our labour in the mid-seventies, taking advantage of the oil boom in the Gulf states. Hordes of unemployed people were exported to the UAE and Saudi Arabia. That eased the job market in Pakistan, and, in turn, we started earning about $2 billion annually. But we did not take advantage of this boom to improve our physical and social infrastructure, and, like a nabob, squandered most of this money on wasteful expenditure.

And what is the state of industry in Pakistan that was so much pampered in the mid-Sixties. It is by no means a mass employment sector sustained. Most of our industries have a high-import content and there is no integrated technological cycle for having a domestically sustained development.

Did the planners and the bureaucrats think that Pakistan could reach a ‘take-off’ stage without fully exploiting our comparative advantage in agriculture and the existing small industry? Or could Pakistan leap-frog into the group of industrialized nations by simply issuing permits and licenses to a bunch of hand-picked traders and favoured plunderers who wanted to became industrialists overnight, without taking any risk or putting their own money at stake?

No one knows why we ignored our potential for developing engineering goods industry, which could lay the foundation of large-scale manufacturing and provide jobs to millions of people. The most unfortunate thing was that we did not pay any attention to human resource development either, although we had inherited a good base for it from our colonial masters. Besides, technical education was almost completely ignored. Look what India did by establishing ITTs which produce thousands of graduates of international standard year after year.

Regional disparities and acute poverty in rural areas was a major problem even in the ’60s, but continuous bad planning and iniquitous distribution has brought back poverty with a vengeance. With each passing day its incidence and intensity is increasing. Besides, we have been living beyond our means for a long time and have taken huge foreign loans without appropriate planning and without producing results. A country that spends more than 25 per cent of its budget on defence, about 50 per cent on debt servicing, and the remaining amount on bureaucracy, intelligence services and subsidies, and keeps on starving the social sector of necessary funds, has to be in a perpetual crisis.

Poverty will not go away through World Bank and IMF fiats, all rhetoric about growth and poverty-reduction strategies notwithstanding. While prescriptions given by them to alleviate poverty do not work, their loan conditionalties hurt the poor the most. We will have to find our own solutions, and use our own resources to ensure a sustained economic growth, which will create jobs.

If the poor of the country have to have any hope for the betterment of their lives, a basic shift in the strategy for economic development will have to be introduced. This will also necessitate a drastic cut on our wasteful and non-productive expenditure.

Pakistanis are a hard-working, disciplined and patriotic lot. In the past, they have shown that they can achieve high rates of growth. Their current productivity may be low, but if the right environment is created, and necessary steps are taken to improve skills and technical human resource development, they can do wonders. The fault does not lie with them, but with the policy-makers.

Right now our major problem is that of governance. There is a total breakdown at planning and implementation levels. Even funds allocated for pro-poor programmes are not fully utilized because of institutional weaknesses and an almost non-existent delivery system.

Regulatory mechanism do not work on the ground; decision-making is at a discount; different ministries and departments follow contradicting policies, not knowing what the other is doing; and the government keeps announcing one-window operations, but over-regulation by umpteen agencies — 38, to be exact — kills the initiative of the new investors. This is what the reality is.

WHAT NEEDS TO BE DONE: Three areas need immediate action under a long-term plan: human resource development, agrarian reforms, and industrial growth.

In terms of the Human Resource Index, we are ranked 135th. Almost 45 per cent of our children have no access to functioning schools, but we keep on talking about a knowledge-based society and a revolution through IT!

We should analyze reasons for our dismal track record in achieving targets in primary education despite two dozen education policies and nauseating slogan-mongering. Our existing approach will not take us anywhere. We will have to find new methodologies and seek professional input if we are serious about achieving results. This is not an impossible task, though. Even some African countries with less resources have achieved 80 per cent literacy rate in 30 years. Why can’t we?

In terms of industry, we need to take a fresh look at our ‘growth’ strategy. The existing one is not going to solve our problems. We will neither be able to increase our exports in a big way nor create jobs. We should now find new engines of growth, in which the lead can be taken by engineering goods and electronics.

We should carefully study the strategy followed by countries like South Korea and Taiwan where they have achieved miraculous results in the sector within a span of 30 years. If we have a long-term vision backed by consistent polices, we can double our exports within a short time, and can also create hundreds of thousands of new jobs.

We have also neglected our agriculture and livestock sector for too long. We have been following a hackneyed path, and are dependent on good weather conditions for our survival. There has been hardly any attention on a practical use of existing water resources, using modern techniques like lining of channels, drip irrigation, and recycling of water.

If credit is ensured to peasants when they need it, and if research-based extension services with marketing facilities are provided to them for improving the quality of their produce, they have the capability to capture the export market in a big way.

We have everything — ample land, water, good weather conditions, cheap labour and hardworking population. What is missing is good planning and commitment.

Having talked of long- and medium-term plans, one has to concede that the poor need immediate relief because they are facing difficult times. In the rural areas of Sindh and Balochistan, labour-intensive public works with potential economic returns should be launched immediately. Similarly, in urban areas, special programmes for providing stipends and skill-improvement opportunities to unemployed graduates need to be launched to provide some relief to them, as was done in the mid-Seventies.

Time for ad hoc decisions, short-term measures, personalized programmes with conflicting objectives is over. It is clear that grandiose projects launched with much fanfare without proper economic feasibility collapse at the implementation level and become a drain on our economy. The sooner we get rid of this practice, the better. We should stop waiting for the arrival of some charismatic leaders. Instead, we should take the route for industrial development that the Asian Tigers took. In the mid-’60s, they were trying to learn from us. Now, for a change, we should unlearn what we are doing, and re-learn from them.

We are at the threshold of a new world order. On the one hand, the WTO has set in a borderless trade regime, and, on the other, globalization is changing the nature of management, competition and the world market. For us, this is no more a question of poverty alleviation. Our economic survival is very much at stake. But is anyone listening?

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