The poor need a new deal

Published December 9, 2002

Our economic managers effusively claim resounding success in rehabilitating the economy that according to them was in the doghouse prior to their arrival on the scene.

In particular, they mention their achievements of the last three years in some exogenous macro-economic fields. In simple terms, that should translate into improved position of balance of payments, foreign exchange reserves and a benign rate of inflation. Though, official inflation data are unreliable, and require a detailed review, it is suffice to state that inflation is also imported into Pakistan like most of other goods. The present global recession and ensuing lacklustre industrial output has lowered the demand and, thus, the prices of major inputs, and is responsible for current general low level of inflation in Pakistan.

However, official circles now sheepishly concede that despite this “spectacular” turn-around in some economic indicators, the level of mass poverty instead of showing decline, in fact has significantly expanded during this period. Even the IMF and the World Bank and other donors have expressed their concern in this respect.

Income distribution statistics in Pakistan are unreliable as well as sketchy, mostly drawn out of samples that hardly represent the reality on the ground. But, even they confirm that the most deprived group of the population in the lowest 20 per cent, shares little over 6 per cent of income now; while in 1970-71 it shared its best at 8.4 per cent level. The same year, middle-income group in 60 per cent received about 50 per cent of this income that now has dwindled to a level of 44 per cent. The winner, of course, is the of top 20 percentile of elite group that received a lion share of over 50 per cent of income, that was at 41.5 per cent level in1970-71. Current data only confirm that middle income and lower income groups have been squeezed further like a lemon for the residual benefit of top 20 per cent of income earners.

But, the devil is in details. According to same official data, a poverty line benchmark is set at an annual per capita income level of Rs7, 800; that is $130 at current exchange rate. This level is less than half of a single day income of a well-connected middle management level public sector whiz kid, employed under newly framed “merit” based policy of the outgoing military regime. Thus, it is obvious that we have obscene income disparities in Pakistan that defy all norms and perceptions.

The same statistics reflect deep rural-urban divide. Poverty is more pronounced in our villages and in our farmlands that constitute the bulk of our population. Our rural poverty is not a new phenomenon, it is the sum total of many millennia of prevalent socio-economic structure of our society. Deep rooted in Hindu caste system, it was nurtured both by the Moghuls and the British for their own ends as the Karma of the poor. The resultant feudalism was the fountainhead of their imperial prowess and mass poverty of their subject. The feudals fought their wars and extracted revenues for them. In an unholy alliance with them, they ruled India with an iron fist, while the rest of the population toiled in conditions of abject poverty.

Thus, Pakistan at birth inherited a social order that was in need of a major overhaul. But, unlike India, we made only feeble and half-hearted attempts in this direction. In early years and even in subsequent three decades, our economy went through a rapid expansion that to some extent brought relief to our burgeoning poor population. Our poverty levels, thus, were caped, and in some years we even experienced their modest decline that picked up steam in the decades of 70-80.When our economic growth rates, foreign aid flows and remittances of our workers started tapering off, our poverty graph started shooting up once again in the nineties.

Our current reported unemployment rate is ludicrously placed at 7.8 per cent that is less than Germany and France. In fact, it is an insult to the common sense of the common man and our planners should take note of this. At present, our agriculture is burdened to support 60-70 per cent level of our rural population. Its conditions of subsistence farming, and its experience of the fast population growth rate, even higher than our urban centres are responsible for a steady stream flow of migration into shantytowns of our sprawling cities. Thus, further exacerbating poverty problems of our rapidly growing urban centres.

Unfortunately, real solutions elude our armchair economic wizards whose undying myopia for western economic system is mostly responsible for our current sorry state of social and economic affairs. Their recipes are devoid of any original thinking and, in fact, are only relevant in the context of boom-bust economic cycle of rich countries. Pakistan with an annual per capita income of less than $450 cannot be in league with the countries in $25000- $35,000 income bracket. Unrealistic prescriptions based on economic stimuli of adjustments in the level of taxation; in borrowing costs and in monetary aggregates do not effectively work in an economy of mass poverty operating at subsistence level.

A recent addition to this armoury is “rationalization” of manning levels of industrial and financial enterprises in the public sector whose main proponents are the IMF and the World Bank. This exercise has been carried out quite extensively in Pakistan with soft loans support from international donors. It is attractively titled as a “golden handshake” scheme for softening its blow to the affected persons. A large number of workers under this scheme have been cajoled into going home with hefty compensation package. Though, its direct adverse impact on them is minimal, its baneful impact on our society is a swelling in the ranks of unemployed in a domino process of expansion. Some estimates, thus, place eight million more souls joining the club of chronically unemployed, though the actual numbers of the affected in the above scheme were stated to be around 350,000 only. Without any availability of western style social safety network in our country, perhaps, this was the “most” unkindest cut of all that pushed more people into the poverty line.

However, this exercise did not improve the financial health of concerned enterprises and in great many cases their performance has deteriorated further. Their operations are still saddled with high operating and manning costs with no perceptible improvement in their cash flows and eventual profitability. Even in public perception, the quality of their services has shown little or no improvements and a great many of them have survived with huge subventions from the government, without which their operations would not have been viable. Most enterprises have not paid any dividend or return either to the government or to their investors. The government poverty reduction programme with its entire wherewithal so far has proved long on promise and short on performance as is obvious from its results of the last three years. In the process, however, it has built up a vast expensive institutional network whose manning costs are prohibitive and whose capacity for the delivery of desired social objectives is limited. Poverty is a disease whose victims need compassion as well as treatment, which can only come through the dedication of institutions as well as of individuals involved in this cause.

A well-balanced long-term funding is an essential prerequisite for the success of any poverty reduction programme. Considering that more than 80 per cent of our people are afflicted with poverty, substantive and prioritized allocations from public exchequer and generous contributions from public and private donors are required for stemming its rising tides. This is not an easy task. Almost 75 per cent of our national budget is consumed in debt servicing and in military spending that are inherently inflexible under the prevailing political milieu. Emerging pressures, both internal as well as external, can easily erode the remainder of our fragile resources to the ultimate disadvantage of the poor of our country.

Hence, unless we find enough space in our budget for this purpose, our programmes would remain dependent on external and internal borrowings and donations from international agencies. This, however, is only possible with a sizable expansion in our tax base. But, here we are already stretched to the limit. Indirect taxes that yield most of our revenues are regressive in their effects and hurt the poor more than exacting any real revenues from the rich. Hence, unless we resume our high growth rates of 60s and 70s in 6 per cent range, we are likely to be ineffective in our revenue raising endeavours. Just think that an addition of 2.5 per cent to our current growth rate could yield us annual incremental revenues of Rs100 billion that would enrich our social action programmes for the benefit of the poor.

The poor are in need of a new deal if the scourge of poverty is to be rooted out. The present institutional support package of collateral-based lending is unrealistic. In most situations, the poor have very little collateral to offer, or it is already consumed in their subsistence borrowings. In the past, our poverty levels declined only when we had achieved high levels of manpower export along with rapid economic growth, or both as experienced during the decades of 70-80. In the prevailing environment of severe global recession, it would not be an easy task. Furthermore, in the present context, only skilled labour can be exported mostly in the fields of new technology, medical and security services provided we effectively develop this market niche. But, it would require intensive investment in human and social capital. On purely domestic scene, in addition to mobilization of manpower in repairs and improvements of our economic infrastructure, it could be groomed into the fields of information technology for the promotion of good governance and an open society. This should relieve sufferings of our masses in general and, in the long run, should minimise frequent eruptions of social disorder. Also, it would promote an investment friendly environment in the country that is necessary for attracting new investments as well as for the revival of the existing moribund industry.

The The writer is a former President of the National Bank of Pakistan

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