The dilemma of achieving meaningful yet sustainable growth

Pakistan has been stuck in a quagmire of boom-and-bust cycles in its elusive pursuit of meaningful growth. Meaningful growth needs to be inclusive of the entire population, not through merely capital formation, with the expectation that the trickle-down effect will ultimately reach the wider population.

Amongst several factors, including structural issues such as the lack of proper land reforms, as well the fragmentation of land holdings, premature de-industrialisation and financialisation of the economy, poorly thought-through trade agreements, the emphasis on accelerated growth in the services sector, lack of investment in people – education as well as mental and physical wellbeing; one significant reason that we find ourselves in this place is the fact that our regulatory and tax policies have over time, created an environment of businesses preferring imports over manufacturing in Pakistan, resultantly, we are now highly import dependent.

To make it worse, selective low-cost acquisition of state lands, resulting in skewed wealth creation, created further affordability and demand for imports, as well as an appetite for investing in properties outside the country.

The predominantly import-based consumption results in inadequate job creation, thus impacting the inclusiveness of growth, and it results in foreign exchange shortages, owing to our low productivity, resulting in low exports, which in turn causes the in the boom-and-bust cycles.

We need to grow the economy at a rate significantly higher than the rate of growth of the population, to translate into improved standards of living. A recent report by the World Bank indicated that 40% of the population is surviving below the poverty line; on top of that there are earlier reports which indicate that 40 million children are stunted owing to malnutrition and drinking contaminated water, as well as 26 million children are out of school.

Clearly, we are nowhere near anything acceptable after seventy-seven years of existence. All the conventional prescriptions, whether homegrown or those prescribed by multilateral economic agencies have failed. We need to take a different approach.

Apart from addressing the flawed policies enumerated earlier, there is no better way of achieving inclusive growth than through economic activity at the basic community level. This is particularly important when we look at the poorer districts of the country. The broader market economy will work only if there is demand created at that level, as one cannot expect a productive supply side in the absence of such demand.

I would propose that we approach this from the angle of direct action to ensure minimal consumption levels by all members of society. This would mean estimating and setting targets for the minimum consumption of basics such as nutrients, living conditions (housing, clothing, an adequate level of energy consumption to cover cooking, lighting in homes, as well as the ability to weather extreme temperatures in not too much of discomfort, etc.) education (improvement in school enrolment, as well as the quality of education) health care; basic transportation needs; and provisioning of communications, including access to the internet. This is not an exhaustive list but an indicative one that must be carefully drawn up.

The question is how we bypass the traditional trickle-down route and ensure the afore stated consumption levels at the basic community level. Whatever we have tried thus far, has failed. To my mind, the approach must be to create demand through direct cash transfers to the community members. If we do so, it will become the basis of developing the supply side to satisfy that demand.

One can envision a small community currently deprived of basics, receiving direct cash transfers which will, at that basic community level, create entrepreneurial opportunities as the spending on basics there will generate activity such as a community member setting up shops, some offering basics like a small school or basic medical facilities, someone getting into transportation services to bring supplies, and so on.

It is this economic activity which will generate consumption led growth at the very basic level, and as this virtuous cycle grows, it will attract regional and national providers of supplies, thereby generating economic activity on a wider basis to meet that demand.

However, as Pakistan is highly import dependent, even goods that we think we produce domestically and therefore ought to have little or no import content tend to have high degrees of import content; thus, we have seen that consumption-led growth in the past ending in current account issues.

Here again, we need to do away with our flawed policies of managing imports through borrowed foreign currency, our export earnings have never been enough to support those imports (except for two years in the early 1950s), even when we include the growing remittances from Pakistani working abroad, these two put together fall short.

By borrowing foreign exchange, we have kept the Pakistan rupee artificially high relative to the US dollar, which has allowed us to consume imported goods or domestic ones with high imported content at relatively low prices, as compared with what they ought to have been had we not borrowed the foreign exchange and allowed the rupee to find its level through pure demand and supply.

Had we done so, we would have been forced to depend more on domestically sourced goods with low imported content, thereby generating productivity within the country, rather than being left highly import-dependent, with millions having to go abroad to find employment.

Farmers would have had higher earnings from produce that is exported and perhaps even gone into commodities that we currently import; the oil and gas (and other mining) entities would have received higher well-head prices in rupee terms, allowing them more investment in exploration, we would have been forced to increase our dependence on mass transit, instead of using individualised transport based on high imported content and using high-priced imported fuel; we would have been more aggressive on renewable energy sources; probably not have allowed the steel mill to shut down; and perhaps by now been engaged in cracking and producing petroleum derivatives and chemicals, all of which we import currently.

On the other hand, exports would have higher earnings in rupee terms, encouraging investment in productivity and production capacity.

Nevertheless, if we now stop borrowing dollars to finance consumption and embark on increasing consumption at the bottom of the pyramid level, we should expect that at the initial stage, we will face a jump in prices, owing to the dollar becoming more expensive, till we start producing more of genuinely domestically produced goods and start exporting more.

In the immediate future, it would be higher prices, while in the longer term, it would have a beneficial impact on domestic productivity. This would also mean that the direct transfers being proposed would need to be inflation-linked.

Many may ask how basic income is different from BISP for the needy. What I am proposing is not a poverty alleviation tool but a growth-generating measure to be disbursed as universal basic income and not a means-tested cash transfer, which entails a very large bureaucratic machinery which needs to sift out and determine the need-based families and then a bureaucratic structure to arrange those transfers, with all the abuse that takes place in between. In any event, the BISP amount is miserably low and does not have any meaningful growth generating features.

The universal basic income would be a fundamental right for every adult citizen, not related to poverty. We have already developed a robust national database and identification structure at NADRA, and in addition, the RAAST payment system sponsored by the State Bank of Pakistan. With these two structures in place, direct transfers can be made with minimum of administrative involvement.

The other question would be as to why pay basic income to even those who are well off, and as to how one would afford this especially in a country where the federal government is consistently running a fiscal deficit.

The first issue is that this measure is designed to increase spending by all citizens with a view of fuelling growth and is not related to the person’s current earning level. It avoids the administrative issues, as well as leakages we currently face with the current safety-net payments. The payment to the high-income groups will either be spent on consumption or will be invested in the economy. In other words, it will not prejudice the objective.

The second issue has several points to consider, which I address in the following paragraphs.

Let me begin with the federal government’s fiscal deficit. There are several reasons for it, amongst which are large amounts of unnecessary expenditure on the various heads and, on the other side, the inability of the government to collect direct taxes from those whom it ought to, but this far, it has been resorting to easy fixes like overburdening those who are already in the direct tax net and supplementing that with very high indirect taxes, burdening the entire population.

To make it worse, the high deficits have been financed by costly bank borrowings, exacerbating the problem twofold, i.e., having to finance the interest and creating further monetary expansion resulting in further inflation.

Apart from this, the distribution to the provinces under the national Finance Commission award has resulted in inefficient spending by provincial governments, as it is easy money coming their way without them having to earn revenue through taxes.

To make it worse the provincial governments, despite a lot of lip service, have not delegated financial power down to local governments, which results in the spending not reaching the grassroot level, and average voter not able to hold remote representative accountable. All these issues need to be addressed but should not be the excuse of not taking measures for growing the economy.

One needs to work out funds needed to finance the basic income to cover the desired consumption targets, however, as a quick start using the minimum wage, which uses similar data, the median amount is around Rs. 35,000 per month for a bread winner of a family.

If we assume that only 50% of that will be paid as basic income, for it to start the ball rolling, while acting as an appetiser for more to be earned through economic activity; also assuming an average family unit is of say six, with two adults, and one splits the payment between the two adults, as it would add up to the desired amount for the family unit, the per adult figure is Rs. 8,750 per month.

However, the government would not be able to, nor would it be desirable to flood the market with around Rs 9 trillion (the payment to 87 million adults) of cash in the first year, I would propose that the target amount is achieved over a period of seven years, by starting at Rs. 4,500 per adult per month and grow it by 11% per annum.

The seven years will allow domestic supply sources to develop and avoid inflationary pressures, as well as for higher exports as our productivity improves over this period. To whatever extent this results in any inflationary pressures, the design requires the basic income to be inflation-linked, thereby removing the fears of the decision-makers being accosted for inflation.

For the first year, the aggregate will work out to Rs. 4.7 trillion. If this is split equally between the federal government and the provincial governments, the burden on the federal budget is Rs. 2.4 trillion, which can be met by doing away with all existing direct payments, subsidies and cross-subsidies, which distort the functioning of markets, as well as all development expenditure (PSDP), which has a focus on disbursement by parliamentarians on projects, the benefits of which, if any, are highly debatable.

While it is for the economists to work out the expected increase in the economy’s growth, simplistically, spending about 2% of the GDP through basic income and growing this each year by a real 11% over the next seven years, reaching 4% per annum ought to have a direct bearing on growing the GDP.

Also, in addition to the economic growth, one should start observing the empowerment of women and their possible involvement in entrepreneurial activities, as well as the employment market. Along with this, based on research by Banerjee and Duflo, fertility rates drop because of economic well-being and not the other way around. Additionally, it will help reduce the sense of deprivation amongst marginalised societies, whether on account of religion or on account of ethnicity.

This proposal is to fuel consumption led growth, but one that creates economic opportunities at the very basic level and avoids inflationary pain while addressing the cost increases emanating from a potentially weaker rupee.

A good example of development driven at the local level is that out of China. They followed what is termed mayor-led economic growth; in other words, communities were empowered to innovate and create economic activities without the central government attempting to direct the economy.

Thus leaving the spending to those who can decide best for themselves, as well as for the free market, to come into play. This is not to suggest that that was the only thing China did, the base was set very early on by ensuring education for all, as well as the inclusion of women in the workforce.

While China is seen as a command based political system, in fact it delegated resources and authority at the local level, which is what helped it create the miracle resulting in seven hundred million people being pulled out of poverty in a few short years and the economy taking off.

This was not a model that China copied from anywhere else in the world, but it innovated; we in Pakistan must stop looking for examples of programmes implemented elsewhere in the world to decide whether we have the courage to take them on. It is high time we start innovating ourselves and doing what suits us. It is direct action and direct action alone that can create miraculous growth for Pakistan. It is time we bid farewell to donner driven prescriptions which have led us to a situation where are sovereignty has been compromised very seriously.