Does austerity lead to prosperity?

Best way to achieve austerity, prosperity is to end govt monopoly over economic resources

ISLAMABAD:

The prime minister, while addressing the news conference announcing austerity measures, said “we have to make collective efforts to make the country prosperous.”

The federal cabinet has announced an “austerity package”, that includes steps such as early office opening, early closure of shopping centres, ban on the purchase of luxury vehicles by the government, sale or lease of government-owned properties, ministers to forgo pays and perks, and travel on economy class.

This, if implemented, will lead to annual savings of Rs200 billion, according to the government estimates.

The steps such as 15% reduction in the government expenditure, ban on the import of luxury vehicles at taxpayers’ expense and commercialisation of state property are appreciable. We should appreciate this even for a symbolic value.

However, I ask this question: does austerity lead to prosperity, as the prime minister said?

First, we need to differentiate between austerity by a government and austerity by households and private firms. Almost all households and all private firms, which are going concern, do not spend more than what they earn. They are already austere. If they overspend, they go bankrupt quickly.

However, the governments do that all over the world. They do not go bankrupt due to their political power and monopoly over economic resources.

Second, the prime minister needs to understand that no nation has become prosperous through austerity.

The best way to achieve both government austerity and social prosperity is that we should end government monopoly over any economic resource. This should not be justified only on austerity grounds, rather it should be part of a permanent policy.

If we need any policy at all, we need a prosperity policy. In its Charter of Economy, PRIME has outlined such a policy proposal.

Government ownership and control of primary urban properties, agricultural, commercial and industrial businesses, and trade of commodities should be done away with. According to this charter, “The government may not monopolise any economic resource. PSO’s monopoly over import of most fossil fuels will end.”

If done in a competitive manner, this will usher in an era of prosperity instantly. It will also help the government achieve its objective of austerity. We give away hundreds of billions of rupees each year to the government so that it can wastefully spend on running businesses inefficiently.

Giving up control and ownership is hard. Politicians will feel powerless once we take back their power to give contracts and jobs through government businesses.

These are really the hard decisions which no government or political party is willing to seriously consider. Instead, we are asking the businesses and citizens to “do more”. Increasing the GST is a tool for the same.

Shutting down businesses at 8pm is another futile idea which seems to have gained a lot of traction. Energy conservation through administrative measures is a bad idea. Let me give one example.

Everyone is aware how we waste water in our farms, houses and factories. The reason is very simple. We are not willing to price the water.

When I was an independent director of Punjab Saaf Pani Company during 2014-2016, I proposed that the government should adopt the Changa Pani model, which is a community-managed project of drinking water supply through a pipeline in Bhalwal.

Water is priced through meters and households pay as per their consumption. Results are amazing. Not only people pay, but the system is maintained while the government-run water supply schemes become dysfunctional.

Then chief minister rejected this proposal. Instead, the governments keep wasting billions of rupees in installing tube wells. By changing the incentive system, we can save these billions and encourage people to conserve as a result of pricing.

Talking about austerity, our favourite bogeyman is import. Curbing imports, as every finance minister from Tarin to Miftah to Dar, and most of the economists, would like us to believe, is the key to managing our accounts.

Miftah started it and it has continued till today in practice. Little did anyone realise that we were tinkering with the very basic nerve of our economy. Once we started stopping imports, even on the fallacy of luxury/ non-luxury distinction, we strangulated the trade flow.

Recently, soap manufacturers released an ad, demanding that the government include it in “essential industries”. Government thinks washing hands is a luxury. We did not stop there.

Import restrictions led to the rationing of dollars and in fact creation of a parallel exchange market. That brought us on the verge of default.

Economics is a tricky subject and sometimes we are caught by the intended consequences following intentions only.

As Bastiat observed centuries ago, we need to differentiate between the seen and the unseen. We need to bring in consequences in our thinking. While people who are talking about austerity are good people and they have noble intentions, their solutions are inconsequential.

The writer is the Executive Director of Policy Research Institute of Market Economy (PRIME), an independent economic think tank based in Islamabad

 

Published in The Express Tribune, March 6^th, 2023.

Like Business on Facebook, follow @TribuneBiz on Twitter to stay informed and join in the conversation.