Pakistan’s dilemma is not just wealth creation

How do you create wealth for an economy? It makes for a good soundbite, and sits well with voters who see flashes of the rupee (or the dollar) symbol in front of them, but it is altogether another thing to achieve.

When a politician says wealth creation, they haven’t necessarily thought through the process and probably the intricacies and public policy measures that go along with it.

The centuries-old barter system entailed that goods were exchanged for whatever value deemed fit at the time before the concept of ‘money’ or notes came into existence. This created the notion that every good has a numerical value, which you needed to possess in money terms for the ability to buy it. This was simply the transfer of wealth. For example, I have Rs10, and want to buy a chocolate valued by the seller at Rs10. It is valued as such because he or she will make a profit on the sale, and ‘create some wealth’ for themselves. On the other hand, I will ‘lose’ some wealth as I have transferred Rs10 to them, but get – in return – some utility based on how badly I wanted a chocolate. In this transaction, as a sum, wealth isn’t really created. It has been transferred from one being to another.

As a public-policy measure, states tend to create rules and regulations such that wealth transfers within an economy result in a more equitable distribution. This results in debates around income tax rates, minimum wage, corporate taxation, rebates among many other policy measures.

Without going too deep in a topic that has been made needlessly complicated by thoughtless politicising, I can safely say that wealth creation in isolation means nothing. The entire statement should be followed by the question: wealth creation, but for whom?

Within a closed economy, wealth creation exists in a variety of forms. The government’s housing project, in which it says it will provide cheaper homes to those lower-income groups that have so far been neglected, will see value- and wealth-creation for all those associated with the construction sector. The project will transfer the state’s wealth – collected through taxes – to different segments, and directly benefit lower-income groups who will now hopefully see an improvement in their standard of living.

When one talks about generating economic activity, a housing project is a simple example of achieving it. Transport, construction, mobilisation of labour, gas and electric utilities are among the associated beneficiaries of such a project that sees the transfer of wealth from government accounts. This is one reason that even in times of distress governments are encouraged to spend in the economy to promote wealth transfer. Austerity steps, while a popular measure, end up stifling the wealth transfers that are generally encouraged.

However, these transfers, which result in greater economic activity, can come at a cost. A simple way to put is the money supply. To create more money to satisfy value creation in the economy, the government tends to print notes or take on debt. An increase in the money supply, especially that circulating within the economy, causes inflation. In such a case, money supply has to be higher than the growth in economic activity for it to become a serious cause for concern.

However, in Pakistan, we have had more of the cost-push inflation than the demand-pull inflation when too much money chases few goods. Cost-push inflation has largely come due to depreciation of the rupee, which has largely been due to wealth transfers abroad either through imports or acquisition of assets in other countries by Pakistani individuals. This is also another reason why a simple concept of ‘wealth transfer’ is extremely important. It holds intrinsic value, and needs to be thought of an equally important public-policy measure next to ‘wealth’ and value creation. Let’s talk about another example. The argument to promote tourism holds immense weight, and there are multiple reasons for it.

Firstly, and most importantly, tourism results in serious wealth transfers. A leisure trip to Dubai taken by someone in Islamabad results in wealth, earned in Islamabad, transferred to a shopkeeper in Dubai. This is an outflow. When you promote domestic tourism, the wealth, in the true sense, stays in the country.

However, there is a bigger incentive to promote tourism. When international travellers head towards your country, they are bringing ‘fresh’ or ‘new’ wealth. This genuinely transfers wealth that has come from another economy – money that was originally generated by activity elsewhere. In other words, it adds to the country’s ‘net wealth’. This is a key reason why colonisation is extremely important to study. Creation of tax havens, which also end up transferring wealth from one place to another, is another key element.

For years, Pakistan has seen wealth and value created inside the country, by its economy, move around and away from its borders. Be it either through purchase of property or something as innocent-looking as a foreign holiday, capital flows have moved out of the country more than they have moved inwards.

Foreign investments, exports, remittances, promotion of tourism are hence, always good places to start if you really want wealth creation. But do not stop there. Do not just create wealth or value. Tell us how you plan on keeping this newly-created value and wealth inside Pakistan. While we do not function as closed economies, and there will always be capital outflows, a net inflow is what Pakistan needs now.

Years have gone by, and wealth has only run away from this region.

The writer is former business editor of The Express Tribune, and winner of the Citi Journalistic Excellence Award 2018. He holds a MBA from Cass Business School, and is currently associated with the CEJ-IBA. His Twitter handle is @bilala_memon

Published in The Express Tribune, March 29^th, 2021.

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