The 'emphasis' of economic policy is now shifting from macro-economic stabilization to an accelerated pro-poor growth, says State Bank Governor Dr Ishrat Husain.
As Pakistan exits from the IMF's Poverty Reduction and Growth Facility (PRGF) in November this year, he visualizes a domestic-driven second generation of reforms "without severe hardship to the population at large."
His statement raises some hopes. The poor are no longer being asked to suffer pains for an indefinite period for an illusive gain. At the policy level, he promises that social well-being of the population will move from secondary to the primary position.
The national targets will be set in terms of social targets and targets for the pro-poor growth, particularly in the field of education, health, nutrition, drinking water, pensions and social safety nets. Tax burden on the poor will be reduced.
On a more optimistic note he says that the impact of financial sector reforms during the past five years have begun to show " some positive results" in pro-poor growth.
The policy makers recognize that high growth rates, targeted at six per cent for next fiscal and years to follow, would not create sufficient condition for significant poverty reduction.
It has to be supplemented by state intervention in social sector and the district governments have to be strengthened. Perhaps, the most effective aspect of this not so effective programme is to empower the people to improve their livelihood step by step. Dr Ishrat Husain has advised the banks to look at financing infra-structure projects initiated by district governments.
The financial sector can help improve income distribution if the less privileged have access to credit provided that lending does not lead to a significant number of personal bankruptcies as has happened in some countries like Argentina. It must propel household prosperity.
The problem of employment and poverty lies in the mainstream economic activity. Unfettered markets lead to accumulation of incomes, savings and wealth in few hands with no guarantees of employment to the vast majority of the population. The state has so far evaded its responsibility to provide jobs to the unemployed.
While in the present phase of evolution of the market, the mainstream economic activity is churning out poverty and unemployment, the poverty reduction strategy operating on the periphery cannot meet the declared objectives.
No doubt, in any economy, the accumulation and distribution of incomes and wealth is a simultaneous process. Corporate profits and savings are essential for fresh investments.
The problem arises when wage earners are denied a fair share in production and incomes, and extreme concentration of wealth occurs. The wage earners are producers as well as consumers, buyers of goods and services. When workers/consumers are impoverished, markets shrink. The outcome is economic downturn. This is proved by rising poverty and stagnant growth in Pakistan in the past decade or more.
There are many imbalances that economies suffer, ranging from export-import gap, shortages and surpluses of commodities, debts and the earning capacity to repay, the household and regional income-disparities to the fiscal deficits arising from governmental expenditures exceeding incomes.
Policy makers make efforts to remove these imbalances, some of them on a priority basis like fiscal deficit and debt management. They forget to tackle the problem of the extreme imbalances in incomes and wealth that produce business cycles (recession, recovery, growth and boom) often with disastrous consequences.
In the last decade, global poverty and unemployment has been on the increase. The world has witnessed one economic crisis every year. In Pakistan also, increasing poverty has deprived the domestic industry, burdened with excess productive capacity, of a vibrant market.
The market buoyancy now witnessed, is externally stimulated as soaring remittances have increased the purchasing power of middle income families of overseas Pakistanis. These have also created excess liquidity in the banks that has reduced interest rates to make consumer borrowing including mortgage loans appear affordable to upper middle income groups.
In the absence of productive investment, reverse flight of capital and export earnings have also helped boost stock and property prices. Quite a bit of these funds have gone into speculative investment.
An eminent Indian economist at an American university Dr Ravi Batra, famous for his accurate prediction of business cycles attributes recessions/depressions to concentration of wealth.
Concentration of wealth gives rise to speculative fever. Extreme wealth inequality is a pre-requisite for bubbles. If the speculative bubbles are quite large, then its bursting gives rise to a deep recession/depression.
Speculative manias precede a crisis. So do mergers and acquisitions that concentrate production capacities in fewer corporate giants. In the aftermath, the concentration of wealth declines and many fortunes are wiped out.
Dr Ravi Batra sees depression as a product of systematic tendencies for distribution of wealth to become concentrated among a few. When that happens demand essentially sags relative to the supply and long cyclic downturn commences. Recession sets in because of a falling demand.
The aggregate demand is made up of total consumption, investment and government spending. Investments are at low levels. Except for fast rising defence spending perhaps because of military operations in NWFP and Balochistan, exceeding budget ceilings, government's non-development spending is restrained because of fiscal deficit targets.
The raise in development budget to Rs 160 billion is respectable but these funds are not being utilized within stipulated time span. The budget amount is lower than the Rs200 bn estimated by independent economists to provide much needed physical and social infrastructure.
In the business cycle of "recession, recovery, growth and boom" how would the consumer fare from bank borrowings. The inflation rate is showing an upward trend. The outcome is rise in the household expenses.
Interest rates are expected to pick up as inflation rate rises. The banks make more money from high priced consumer credit plus fees than from corporate lending.
While mortgage financing provides borrowers with an opportunity to leverage their incomes to create wealth, purchases of cars and durables through credits are expenses from borrowed money. It amounts to mortgaging future incomes for current comforts and luxuries. On this count, consumers are under heavy debt in the United States.
As the demand picked up, the prices of cars and construction materials like cement, steel etc began to spiral. The Vice-Chairman of Pakistan Contractors Association, Sindh, Naeemuddin Ahmed Siddiqui, told this scribe that the price of reinforcing steel has jumped up during January -March from Rs30,000 to Rs50,000 per ton. The Consumer Price Index is also showing an upward trend.
The pockets of middle income groups seeking loans to build a house, would be squeezed by rising prices of building materials and expected rise in interest rates. In the last quarter, an unprecedented number of 11,000 personal bankruptcies were reported in the United Kingdom.
In industrial economies, acquisitions, mergers and alliances that have created cartels, monopolies or oligopolies leading to concentration of wealth, have preceded the recent recession as have been in the case of other major recessions and depressions.
Hit by recession and corporate fiascoes, these companies are being bailed out by cuts in interest and tax rates as well as government subsidies in case of airlines by the Bush Administration.
This trend is also evident in Pakistan as weaker banks and financial institutions are being encouraged to merge under a policy to have fewer but stronger banks. So far, 37 mergers of financial institutions have come into effect.
With the withdrawal of many foreign banks, the market segment served by them is dominated by their three Western peers. There are monopolies in branded tea, ice cream and other items.
So far, the concentration of capital may not appear to be a major problem but the movement in this direction needs to be combated by an updated law. An anti-competitive environment should not be created.
With improved demand, the utilization of the excess capacity in traditional industries is rising. If the current consumption trend continues, new productive capacities would be created later.
This may boost investment levels. But a right balance has to be maintained between concentration and distribution of incomes and wealth to avoid an economic downturn.