DURING the last fifty-eight years we did everything what donor countries and international financial institutions (IFIs) advised us to do for improving our economy and for reducing our poverty. On the advice of IFIs, the “trickle down growth” strategy and import substitution polices were adopted. This was followed by nationalization in 1970s and since the late 1980s liberalization, privatization and deregulation policies have been pursued vigorously.

Now, we have stabilized currency, reduced fiscal deficit and debt ratios, liberalized trade, relaxed regulations, privatized public sector assets, overhauled tax systems, imported all sort of consumer goods from pizza to computers, and have adapted every other western invention, from ball-point pen to nuclear technology. Yet, we have failed to reduce the disparity between the rich and the poor.

In this endeavour, Pakistan is not all alone. There are so many other so-called under-developed countries around the globe that have received similar advice and have been unable to reduce poverty and develop their economies.

More recently, to be more precise, in the late 1990s, the World Bank came up with a new remedy, the so-called “pro-poor growth”. If this remedy is called “pro-poor growth”, does this mean that all previous growth policy prescriptions which were given by the World Bank to the poor countries were anti-poor? How would the World Bank respond to all those Third World poor people who have, so long, suffered due to the Bank’s bad advice?

First, there is a need to differentiate between the World Bank’s “trickle down growth” and “pro-poor growth” remedies. The “trickle down growth” stresses upon the acceleration of the pace of growth; and with higher growth more resources would “trickle down” more or less automatically for the poor.

“Pro-poor growth”, on the other hand, is about how to accelerate growth in ways that reduce poverty. Perhaps not even a thin hair separates the two views. The reasons are simple and very straightforward.

In both views, the power of capital accumulation in reducing poverty is undeniable. Both views stress that poverty declines where growth through capital formation is rapid and therefore policy makers who seek to reduce poverty should implement policies that enable their countries to achieve higher rate of growth through capital accumulation. Last but not least, both views prescribe a piecemeal solution to the issue of poverty reduction.

The first two points related to the “trickle down growth” and the “pro-poor growth” models seem reasonable since self-sustained rapid growth through capital accumulation helped almost all of the developed countries of the world to prosper. Therefore, these points require careful examination. But Pakistan’s Poverty Reduction Strategy Paper (PRSP) finalized in December 2003, and the current budget allocations on education and health must be looked at first.

PRSP in fact stresses on the acceleration of the pace of growth and assumes that this will reduce poverty and unemployment. The other elements of the PRSP include: investing in human capital, targeted interventions, expanding social safety nets, and improving governance. These are statement of intent and not necessarily for budgetary allocations.

For instance, the 2005-2006 budget makes allocations for education and health (the two principal factors and indicators of poverty alleviation and pro-poor growth) under both current and development expenditure heads. Total allocation for education is Rs32.86 billion. Out of this Rs16.64 billion will be spent under current expenditure head, while Rs16.22 billion will be spent under the development expenditure head. The total expenditure on education will be less than three per cent of the total 2005-2006 budget. The health sector will receive Rs13.52 billion, which is only 1.23 per cent of the total 2005-2006 budget. If this is the “pro-poor growth” policy, then we will never attain our objective of poverty alleviation.

Now, the first two points regarding the “trickle down growth” and the “pro-poor growth” strategies, which are supposed to help us in developing our economy and reducing our poverty. We begin our analysis by asking simply centuries old question: why are we poor and others rich? Adam Smith addressed the same question almost two hundred and thirty years ago. While analyzing why some countries are rich and others poor, he found the answer to wealth and poverty in simple syllogism: The division of labour determines productivity. The extent of the market determines the division of labour and hence productvity.

To explain his principle of division of labour, Adam Smith described the process of making a pin. He observed that ten people could make 48,000 pins a day due to proper division and combination of their operations. Had each worker tried to do all 18 operations himself, he could not have made even twenty or perhaps even one pin a day.

Smith showed among other things, that labour-saving (capital-intensive) technology could lead to raise productivity and growth through capital accumulation and thereby make nations rich. This proposition has also led the World Bank and the other donor countries and financial institutions to believe that what worked in the United States and the western European countries could also work in the developing countries. That is why they have been advising the Third World countries to implement only those policies that enable these countries to achieve higher rate of growth through capital accumulation.

If this is so, why have we not been able to achieve prosperity despite our growth strategies and huge efforts for the capital accumulation during the last fifty-eight years and why have we been unable to develop our own capital-saving (labour-intensive) technology appropriate to our factor endowment?

In the process of innovation over time, the existence of labour-saving technology is prerequisite for capital-saving innovation. A capital-saving stage is inevitable but it is at a later stage of the sequence by which an industrial economy lends itself to an innovation. The United States and other developed countries with relatively scarce labour and abundant capital developed labour-saving technology before they took capital-saving path.

Pakistan, like other developing countries with relatively scarce capital and abundant labour, has been unable to start right off upon a capital-saving path. Pakistan does not have the organized domestic capital goods sector that is needed to make capital-saving innovation. Capital goods are imported from abroad. This essentially implies that we have not yet developed the technological base of skills, knowledge, facilities, and organization upon which further technical progress so largely depends.

Unless a high degree of specialization and labour-saving technology is achieved, we cannot take a capital-saving path. But a sizeable capital is required to achieve that degree of specialization. We are doubly handicapped: we can not have one without the other and we are deficient on both accounts. That may well be the reason that that we have remained underdeveloped and poor.

With this scenario in sight, there is a need to search new solutions to our problems. If our scientific community possesses enough talents to build a nuclear device, and grasps and uses modern technology, and our small and medium sized enterprises have the entrepreneurial ability to take risk, then why can not our economists have the imagination to sort out the solution of our own economic problems right here in Pakistan?