Milk and honey

Pakistan will need to create a fine balance to ensure that the economy grows, while the poorest are not left behind

One term is pretty popular: “Pakistan is a ‘security’ state”; and Imran Khan is not the one saying it. And then: “it must change to a ‘welfare’ state”; Imran Khan says it with boring regularity. There isn’t a more anodyne statement simply because it is existentially true, universally applicable, and farthest from becoming a reality, anywhere. Imran Khan cites Medina as a model that should be replicated without referring to either the composition or the context of the times. Riches accompanied every military conquest, bringing more political and economic power to the Islamic state. Welfare was rooted in Medina’s economic strength that made it ‘the’ model.

In contemporary times, the riches come through other kinds of conquests, and welfare gets defined in different terms. When IK says he is going to bring the price of oil, diesel and electricity down, he is playing to the sentiments of people who are hard-up against the challenge of keeping their dignity. And while recent events in the oil market may actually permit someone working in spot buying to benefit from the downturn, the future remains uncertain and pricey. Trusting a market that runs on international manipulation of the price of oil meant to deliver geopolitical dividends, say in Crimea, is not something one can base their policy on.

Pakistan makes expensive electricity through oil and sells it cheap to its baseline users, who number in the millions. Some areas and functions either enjoy free electricity or very cheap electricity, while the proverbial line losses because of an antiquated distribution system add to the state’s fiscal burden. Power theft with the connivance of the corrupt distribution staff is yet another unaccounted loss. That hardly makes for a profitable model; not for the state surely that already runs a huge deficit and must make for the deficit while purchasing power from expensive producers.



IK is right; one may replace the thermal model of electricity production with the hydel one, but the gestation period itself is so long that a government may actually need two full terms of office to complete a project or two. That is asking for a lot of patience on the part of the Pakistani people. So, the state runs against two imperatives: it needs energy quickly to boost growth and ends up using the more expensive thermal model; and, it must still provide some relief to the people and ends up selling expensive electricity on cheaper rates. The deficit continues to grow, and loans multiply. How may one break this stranglehold? No one says a word.

How do states get rich? Simple answer: through growth. How do you grow? Especially when you need to do so at the rate of at least eight per cent to accommodate the burgeoning job market. That is Pakistan’s dilemma. This conundrum has been cracked before, luckily. The Western world and China are referred to as contemporary models, but may not be as easy to follow. For Europe especially, it has been a long trudge and yet economic challenges beckon. But most developed countries progressed because of education, technology, research and innovation. Plus, they have been at it for a hundred years at least, if not longer. None of those making huge promises to the people of Pakistan are likely to last as long.

China was all about FDI and then a cheap labour market, which then transformed it to a mid-level consumer market. IK explains that simply, but forgets to add from where would he attract the much-needed capital to usher in both growth and subsistence? Conventional economic wisdom would suggest that growth must find priority to produce capital, which will initially need to be loaned from the market, or from the IFIs. One other way is to sell your wares — minerals, coal, agriculture, tourism; family silver. Without preparing first for a profitable reinvestment of what we earn or borrow, the capital will eventually run out in subsistence support.

The three imperatives before growth can be realised in the Pakistani context are infrastructure, energy and technically equipped labour, which can attract domestic or foreign investment. By any which way you count, Pakistan’s economy will need an initial sizeable investment and policy support by the government for each of these areas of the economy before private capital can be lured. Growth will only then trigger returns, enabling relief and subsistence.

Onto the next most propounded theory in search of a welfare economy. Tax the rich, subsist the poor. There are countries of Europe that are perhaps, closest to having the highest welfare standards as there can be; which tax their rich over 50 per cent of their annual income and run their societies with social security systems meant to ease life for the needy. Most citizens make accurate declarations of their incomes because a violation entails even heavier penalties. Most of these economies are saturated in growth, recording growth rates of around one to three per cent. Saturated economies also imply that they have stable patterns of incomes, which are taxed at their respective levels as a way of life. Minimal variables help establish a socioeconomic status quo that is agreeable to all.

In nations where growth is high, the capacity to grow indicates unutilised capacities rather than a fantastic economic performance. Afghanistan, for example, is estimated to grow, if at all, at around 13 per cent, indicating a rather low economic base. In such economies, income distributions vary wildly without establishing a pattern. Not only is the economic management very weak in such cases, the data pertaining to such growth is also mostly assumptive. The existence of unregulated parts of the economy imply that there is a lot that is not transparent, making it difficult to track tax evasion. Pakistan is one such example. That is why taxing will need preparatory steps, which will have their own set of challenges. That is also why weak economies tend to resort to indirect taxation.

Tax alone as a strategy is the antithesis to growth. What the Pakistani economy needs is growth before it may subsist. The US avoids taxing as heavily as some European nations simply because its economic sense tells it that there is still space to grow and rather than scare people with money, indulging them to invest more and create more wealth is the right choice to spare fiscal capacity. Pakistan’s predicaments are too many and its choices are not as lavish. It will need to create a fine balance to ensure that the economy grows, while the poorest are not left behind. Populism must not blind us to the realities that remain far more stark.

Published in The Express Tribune, November 1^st, 2014.

Like Opinion & Editorial on Facebook, follow @ETOpEd on Twitter to receive all updates on all our daily pieces.