KARACHI, Aug 31: Discarding conventional wisdom pursued by the policymakers, independent economists now advocate “a full-fledged return to state-led development” for a interim period of two years.

What, in essence, these economists are pleading for, is a tactical retreat from fiscal stability approach for a strategic advance towards the objectives of high economic growth and poverty reduction.

To quote a HBL economist, there is no future for “growth engines”. Of course, it goes without saying that the consequences could be far more serious than what the country has seen so far.

Admitting that state-led development offers “a grim alternative”, economists at ABN-AMRO add that “the counter-factual outcome is far worse — rising unemployment, greater poverty, further erosion of purchasing power and a possible deferment of the pick-up in the private investment.” The report has been prepared by the bank’s economics department headed by Sakib Sherani.

Discussing policy issues, a 12-page well-researched ABN AMRO report suggests a combination of steps that may provide additional fiscal space needed to boost development spending to around five per cent of the GDP from the budgeted 3.3 per cent and the overall public investment to seven per cent of the GDP from the budgeted 5.5 per cent.

A retired federal economic affairs secretary, who has served the Asian Development Bank, says that a budget deficit between 5-6 per cent is manageable for a short while but 6-7 per cent would have serious implications.

The ABN AMRO Bank report also proposes measures for “galvanizing private investment and arresting the alarming rise in poverty levels.” These include tolerance for a higher fiscal deficit for an interim period of two years (up to a total of 1.5 per cent of the GDP).

While pleading for state-led development, the bank economists also stress the need for greater efficiency in identifying, planning and executing projects by the public sector.

Other steps include: a faster and more effective programme of containing revenue leakages at the CBR levels and a re-launch of the tax broad-basing exercise that has been effectively stalled since early 2000.

Conceding that policy changes are more likely to be perceived negatively by the IFIs and the international credit rating agencies, they point out these would, however, address the two most pressing problems of low investment and rising poverty. If shortfalls in the fiscal consolidation targets are partially compensated with a lag and through some other measures listed in the report, ABN AMRO researchers say: “The IMF programme would not be threatened.”

The bank report, however, does not mention that the last fiscal year ended with a seven per cent deficit and Finance Minister Shaukat Aziz told this scribe recently that “you should admire my courage.” Of course, it was one time waiver allowed by the IMF for restructuring of institutions like KESC and Wapda. The original target was just over five per cent.

The opportunities offered by September 11 and the limited choice for an alternative to President Pervez Musharraf for the United States seem to be immense. The changing political environment, as the country moves towards parliamentary elections, is helping Pakistan to get one waiver after another from the IMF. The most recent example is the withdrawal of GST on medicines. The levy of GST was perhaps not a mistake as the finance minister has put it but an issue of persuading the IMF.

The question is of seizing an opportunity. If a short- term intervention or state-led development can help, the government should not avoid it. The IMF’s concern should be limited to overall direction of things over the medium or long-term depending on the nature of each issue or problem.

At the economy-wide macro-level, the ABN-AMRO report says that a large negative output gap has persisted for much of 1990s with GDP growth averaging 4.5 per cent in the decade vs an estimated potential output growth of close to six per cent.

At the micro level, excess capacity exists in most large industries. A substantial portion of the new fixed investment by the private sector is concentrated in five industries — autos, cement, PSF, textiles and sugar. A large negative output gap in the economy and excess capacity at the enterprise level cannot be addressed simply through monetary policy, says the report. The remedy suggested is: provide a potent fiscal tonic by raising aggregate demand via pumping priming or extend incentives and subsidies to the affected industries.

Yet in another report “Economic Focus” published by Habib Bank, economist Irum Ibrahim says “one of the most critical issues for Pakistan’s economic managers today is the slump in the economic growth and lack of any obvious future for growth engines.”

The government needs to take care of the growth engines, if Pakistan’s economy is to be put on a sound footing.