IMF, smokescreens and visions

Going to the IMF for a bailout package suggests a failure in economic management, particularly in terms of fiscal and trade deficits.  In this case, it is a failure of the last elected government. That Pakistan is a member of the IMF or that it has secured a loan (at three per cent) above the rate paid on the 10-year US treasuries (currently about 2.75 per cent) does not change the fact that it is a bailout. If five years hence, the new elected government has to go to the IMF, one will be able to safely conclude that the current team of economic managers has similarly failed. For the moment, this administration is been given time to deliver and many are hoping it will not pass the buck like the last government did.

The negotiations with the IMF were a well-managed charade. The smokescreen was that the government would insist in the negotiations to ‘no new taxes’. I call this stand a charade because everyone knew that there would be a bailout and that the government had already made the most of its concessions in the pre-negotiation budget that it rapidly passed on taking office. Other concessions were revealed after the negotiations and the image created was that the government stood its ground. The IMF as usual tried to appease the Pakistani public by saying that the government’s plan is ‘home-grown’ and as usual it took the fall for the hike in power tariffs.

There is nothing home-grown about the IMF austerity packages, which have delivered little in Europe or elsewhere. But, at least, the IMF has a vision. Some economist like Joe Stiglitz view it as immune to evidence and that is why they dub this vision as market fundamentalism — the belief that free market reforms and fiscal austerity will deliver economic growth.

Economic globalisation, promoted by international organisations like the IMF, has strengthened capital which can move across borders at the expense of labour, which is less mobile.  Governments thus need to buttress labour, which in the current era has this inherent weakness.  Even so, neo-liberal economists harp incessantly about ‘structural reforms’, such as labour market reforms and other deregulations and this strengthens capital further at the expense of labour, and other social groups and the environment. Without social safeguards, this is a dangerous prescription.

One does not need a long report to summarise what has worked in the last 70 or so years since development economics was founded as a field; most of this is common sense. Businesses operating in a competitive environment have been an engine of growth. Thus sensible policies that enable them to diversify the economy, move up the technology chain and break into export markets to address the foreign exchange constraint are needed. Governments that have succeeded have addressed constraints (research, infrastructure, credit) to enable this to happen. At the same time, to ensure inclusion and higher productivity, these governments have addressed inequality, invested in humans (education and health) and put safety nets into place. These are structural reforms that are sensitive to social justice compared with the justice blind, neo-liberal prescriptions.

Going back to negotiations with the IMF, the issue of ‘no new taxes’ pushed by the government as a negotiating stance is a red herring. There really is no problem raising taxes on the very wealthy, particularly if the exemption rate is high enough — as it is in Pakistan’s case. This slogan only benefits those, who do not want to pay for the services they disproportionately benefit from. Direct taxes (like income and wealth) are 19 per cent of the revenue budget while indirect taxes, like sales, are 31 per cent of the revenue budget. In this context, the finance minister suggesting that a one per cent increase in the sales tax does not matter is a Mary Antoinette like statement.

The IMF needs to worry about being paid back so austerity from its perspective as a lender makes sense but why does a country producing anaemic growth rates have to put up with austerity?  The finance minister stated that “the austerity measures are likely to be painful”. The question is austerity for whom and what does the country get in exchange?

Let us now turn to the ostensible compromise from what has been revealed so far and how this will impact businesses and the poor. Put simply, no new income/wealth taxes in exchange for cutting subsidies and exemptions and increasing the power tariff and sales taxes. Also, the government plans to borrow an enormous amount on the expenditure side, which could crowd out business borrowing if the interest rate rises or if credit is not extended. Alternatively, inflation could be an issue, which again, disproportionately hurts the poor like sales taxes.

If well applied, exemptions and subsidies can be part of a sensible industrial policy; one that could deliver jobs and the foreign exchange that would free Pakistan from the IMF. Of course, if these exemptions and subsidies are granted to cronies rather than as rewards for delivering good performance in a competitive market economy framework, they are better eliminated. This all depends on the quality and reach of economic management.

The power tariff increase will again hurt businesses. Fortunately, there is an exemption for the lowest levels of consumption, although the more important issue is extending service to those still completely deprived and those with connections, excessively deprived.

Signing an IMF agreement does not necessarily mean buying into the IMF vision. There is always plenty of wiggle room. One hopes the present government realises that it has been elected to serve. For the sake of the political process, I hope it serves out its term. Delivering inclusive growth would be the best service to the country and also the best mechanism to ensure the survival of the political process.

Published in The Express Tribune, July 9^th, 2013.

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