AN increasing number of observers of the development scene, other than those who are its, often unwitting, architects or those who are its fortuitous beneficiaries, are becoming sceptical of the continuance, much less sustainability, of the present trends in growth distribution and poverty.

However, the government seems to be wallowing in the self-created euphoria of its economic successes.

As long as the government puts blinders on its eyes to see only what glitters and plugs its ears not to hear anything that sounds discordant, it is difficult to expect that the country can be saved from drifting to an economic precipice, in addition to the political quagmire that it finds itself in.

The burden of this article is to bring out the inter-connections between the latter two predicaments and the need to address them in a holistic, rather than in an artificially segmented manner.

A brief review of the recent macro-economic trends indicates that after a rather lack-lustre growth in the 1990s which was labelled as a ‘lost decade’ of development by the economic managers of the 1999 coup. The economy was stabilized on a near-zero (per capita) growth path until 2001, as a result of some softening of sanctions against nuclear explosions and debt-relief measures initiated during the Nawaz Sharif regime.

As is now well recognized, by all except a few, the big break for the economy came after the 9/11 U-turn by the military regime, which was finding it difficult to establish its legitimacy, both at home and abroad, and to manage the economy under the tough conditionalities imposed by the IMF loan. This was reflected in the acceleration of average annual GDP growth rates of about 5.5 per cent over the five years 2001-06 compared to only 3.3 per cent annually during the preceding four years.

The “stellar” performance of the economy of 8.4 per cent growth last year, which has given rise to an unwarranted euphoria about the economy’s long-term prospects, has been followed by a slow-down which has pushed this year’s forecast to two percentage points below that peak.

In the absence of major changes in the structural fundamentals of the economy, it is unlikely that the economy will be able to significantly break the six per cent growth barrier on a long-term basis.

The medium term growth prospects are likely to be clouded by the political uncertainty stemming from the 2007 elections, the President’s plans to give up the uniform and the fluid state of Pakistan’s foreign relationships, particularly with USA and India, along with the government’s inability to defuse the increasing number of domestic flash points, such as Balochistan, FATA and the earthquake-affected areas and the security situation in Karachi.

The SBP will remain on the horns of a dilemma whether to moderate inflation or stimulate growth. The challenging task of the new State Bank Governor, who seems to be finding her feet in her new sandals, is to ensure a “soft-landing” of the economy in the medium-term and the strengthening of its fundamentals in the long-term.

She has already done a commendable job in resisting the pressure to use monetary policy for political purposes and by pointing out the role of “hoarding and collusive price setting by industry”, run by the regime’s cronies, which besides the rise in oil prices is the major cause of inflation.

Monetary policy alone will not be able to rein in inflation, without causing serious harm to the economy. What does seem to be necessary is to ensure that the now almost-privatized banking system does not overextend its portfolio to risk a Mexican-style banking crisis, which Mr Javed Burki is warning against, which may be remote now but could take us unawares as did the East Asian crisis amid the celebration of the Asian Miracle. Complacency and lowering of the guard could exact a heavy price. This year, however, the risks seem to be higher in the face of rising current account deficit and other imbalances highlighted in SBP’s first quarterly report.

Uninspiring as it may be, the growth picture is not as bleak as other features of the economy, especially poverty, inequality and regional and sectoral imbalance.

Recent official data on poverty, whose credibility is not above suspicion, shows some fall in the number of people below the poverty line between 2001 and 2005. Apart from the frequent niggle that the government manipulates economic data, which it has never convincingly repudiated or subjected to independent scrutiny, it needs to be realized that such data are subject to varied interpretation.

As Paul Krugman in one of his recent columns has put it succinctly, “Laypeople tend to treat official statistics as gospel; professional economists know that putting these numbers together involves a lot of educated guesswork — and sometimes the guesses are wrong.”

If this is true for such an advanced economy as the USA, it is likely to be infinitely more valid for Pakistan, where there are almost no counter-checks available to verify official data.

The degradation of the study of poverty from a research-motivated endeavour in the early seventies to a money-making industry since the 1990s, often funded with generous donor funds to provide support (or censure) of the performance of the regime in power, is one of the more unsavoury developments in recent years.

It has had the unfortunate effect of diverting policy focus from the real problem of developing credible strategies of poverty reduction to a self-serving numbers game.

The government’s present strategy of poverty reduction consists largely of state-administered poverty alleviation programmes, with NGOs working as intermediaries, with a minimal reliance on fiscal transfers as the tax-GDP ratio remains almost stagnant at 10 per cent.

The government claims that there has been a growth in poverty reduction expenditures from 3.8 per cent of GDP in FY02 to 4.8 per cent in FY 05. However, the benefits of many of these expenditures often accrue to the non-poor, as a result of the lack of transparency and elite capture of such expenditures, in the absence of strong political institutions to oversee them.

The flawed nature of the strategies of poverty alleviation pursued currently arises from their treatment of growth and distribution as two separate, rather than integrated issues, with the former receiving predominant attention and the latter treated as an afterthought.

We must think of reducing poverty and inequality as an integral part of achieving high growth rates, rather than achieving high growth rates first and distributive goals later, a strategy which has miserably failed in South Asia for the last five decades.

How can this be achieved? The answer can be found in a remarkably lucid, non-technical but well-argued little book, titled Development with Dignity, by the Indian economist, Amit Bhaduri.

He argues for an employment-centred approach to poverty reduction. Although still wedded to the dream of becoming an economic superpower through its strengthening strategic and economic relations with the US, the Manmohan Singh government has reluctantly bitten the bullet of this strategy by agreeing to partly fund the Employment Guarantee Scheme, on a limited basis. This adaptation of Keynesian scheme of full employment had long been scoffed at by neoclassical economists as a recipe for inflationary finance which would “crowd out” private investment.

Prof Bhaduri convincingly demolishes such myths as “there is no alternative” to the neo-classical model and that “government can’t do it” and that “there are not enough resources” to provide employment to all in a developing economy.

Bhaduri’s strategy is centred in providing the poor with adequate purchasing power through productive employment with a statutory minimum wage. Moreover, the strategy does not require the creation of these employment opportunities by the government, but through the demand for local public goods identified by the people which would attract more productive investment and enhance employment opportunities further.

The greatest hurdle against such a strategy is the question of financing them on a large-scale in view of such constraints on public spending as the Fiscal Responsibility Act introduced under pressure from the IMF and the World Bank.

Bhaduri’s innovative suggestion to overcome this hurdle is to finance the employment guarantee scheme is by expansion of public borrowing much in the same way as the US is financing its massive fiscal and current account deficit, with the important proviso that the government’s securities will not be sold to foreigners.

In Bhaduri’s view this can be done without impairing government’s credibility as long as “the money is well-spent to create employment growth, accompanied by improvement in decentralized infrastructure and a rapidly expanding domestic market.”

So long as the money is well spent and results in the improvement of the economy’s performance as well as the reduction in poverty, the government would be able to borrow from the public without increasing the interest rates on its loans.

Bhaduri argues that with the existence of idle resources in the economy – and in the case of Pakistan, the existence of untapped savings because of the low returns by the banking system – it would be possible to raise domestic borrowing without creating inflationary pressures and crowding out private investment.

However, Bhaduri’s strategy can only be realised through the agency of the state, albeit a democratic state driven by the will of the people. The political process through which the state can acquire such an agency role would require the intervention of the people in a democratic polity, which is presently weak even in India and almost non-existent in Pakistan.

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