Cosmetic to the coreBy Dr Faisal BariThis year’s budget and the economic survey have been unveiled in the background of a lot of cacophony. The government has been praising its wonderful performance. They cite the GDP growth rate, declining poverty, decreasing unemployment, high foreign remittance, foreign investment, aid, the success of the privatisation programme, the consistent level of reserves and the stable interest/exchange rate position as evidence of the success of this government. The managers have been telling us that Pakistani economy, over the last few years, has been amongst the top few fastest growing economies of the world.
But the critics and the common man have been equally vociferous as well. They talk about the high inflation rates and the inability of the government to manage prices of most of the necessities, the increased price manipulation across markets, the high levels of unemployment and poverty that still persist, the excessive non-development expenditures of the government, government’s penchant for buying expensive toys like luxury cars and planes, and very expensive toys for the military. They talk of the declining national savings, low investment levels, high trade and current account deficits, rising fiscal deficits, poor law and order condition, and the poor state of most institutions of the country.
Whether the government agrees with the picture the other side has painted or not, and whether it was due to public outcry or impending elections, it is a fact that the government has acknowledged the need for ‘sharing’ the fruits of growth and prosperity more widely. Though most of the steps the government has taken are generally considered cosmetic and useless, the government has acknowledged the need for subsidies in many areas and the need to reach out to the polity.
Enough has been written about the budget, analysing the pros and cons, the benefits to various groups and classes, and the impact of budget proposals on all and sundry. The critics and the media have used each other enough to create quite a circus around this year’s budget. One hopes that this has been helpful for the people, but it has definitely created a buzz for the media and raised advertising money for them. This article is not about the budget per se, but it is about what this budget signifies. The argument that we are going to develop is a simple one, but one that needs to be aired, talked about, debated and understood, since it is likely to have a significant impact on our future as a society and as a nation.
Through this budget and the Economic Survey 2005-06, the Government of Pakistan, has finally acknowledged that a) the fruits of whatever progress we have been making have not been reaching the poor, b) there are groups in society that are hurt badly, and c) there is a need to reach out to them. We disagree with the means that the government has chosen to reach out to the poor, but it is important to realize that the government has acknowledged, to an extent, that it has failed to distribute the benefits of growth to significant numbers, and its hopes for a ‘trickle down’ have been dashed.
By claiming to give subsidies of more than Rs100 billion, though many of them already in place before, the government has acknowledged the need for immediate corrective action and has admitted that things were not going well for a lot of people in the country. By raising the size of the PSDP to Rs400 billion plus, the government has acknowledged the need to create jobs, create new infrastructure and spend on maintenance of neglected older infrastructure. But, sadly, this acknowledgement does not go far enough. We are not talking of the efficacy of the measures announced as enough people have talked enough about them. We are referring to the fact that even though the government has acknowledged the failure of trickle down, it has not diagnosed the problems correctly, and the correctives that it has suggested, and these are weak as well, are also not going to address the problems. But in fact, they are going to make the problems worse. The government has basically said that given that we are close to an election year and there has been a lot of hue and cry by the public, they will offer some palliatives as a way of getting some brownie points. But the real issues are different.
Increasing inequality, marginalisation of even the lower and middle middle-class, and increasing dissatisfaction with the system are actually systemic issues and causally linked with the model of growth that the government has been following and is planning to continue to follow for quite sometime.
Liberalisation, privatisation, de-centralisation and opening up create opportunities for growth and profits on the one hand, but they also create pockets of poverty and deprivation on the other. As government jobs vanish, right-sizing occurs, advanced skills and larger assets are demanded by markets, those who do not have these or have lost these due to a shock are left behind. Given that Pakistan had started following this model when a large portion of its population was illiterate, labour skill levels were low, and human and physical assets were quite asymmetrically distributed, increasing inequality is a logical consequence. There is plenty of empirical and theoretical research in the economics area that establishes these linkages fairly robustly.
The inequality numbers for the last five years, are given in the accompanying Table. They show, as we have implemented structural adjustment programmes comprising opening up, liberalisation, de-regulation, right-sizing and down-sizing over the 1990s and into the current decade, inequality has been consistently increasing and at a fairly rapid pace. The Gini Coefficient, a widely accepted measure of inequality based on the distribution of income/consumption across the entire society, with larger numbers representing higher inequality, has increased significantly for Pakistan over the last 4-5 years. This is true of both rural as well as urban areas.
More importantly, we find that the income/consumption share of the poorest 20 percent of the population, in the total income/consumption of the country, has gone down significantly from 5.30 percent to 4.80 percent. And again the trend is the same for both rural and urban areas. Interestingly, many people in Pakistan have argued that the middle class is growing — some ministers have even talked of the many motorcycles that the middle class is buying — but we find that the share of the middle sixty percent of the population, a group that includes lower as well as upper middle class, has also decreased across the country. The decreases are larger for the lower middle class as compared to the upper middle class, but they are there for all.
The share of the richest 20 percent of the population has expanded substantially in Pakistan, and this is true especially for the urban rich. This is very much in line with the hypotheses given above regarding the marginalisation of the poor, the shrinkage of the middle class and the expanded set of opportunities for the rich due to the growth model being followed by the government.
Finally, the last line of the Table makes the point in another way. The ratio of the share of the richest 20 percent to the poorest 20 percent has increased significantly, showing that the distance between the rich and the poor has become much larger. If the poorest are subject to poverty traps as well, and we will argue below that they are, then we are essentially consigning the poor and their children to a life of indignity and deprivation forever.
Whether increasing and high levels of inequality are a problem in and by themselves or not (most people believe they are), they do lead to major socio-economic issues in most societies. High levels of inequality show up in constrained circumstances for marginalised and minority groups, they lead to ghettoisation, possible poverty for the lower classes, constrained circumstances for even the middle class, geographic, ethnic and religious tensions, and problems for the smooth functioning of social, political, and economic systems of society.
People who are left behind feel left out and feel they do not have a stake in society. People doing well create sub-groups and ‘islands of prosperity’ that isolate them from the rest of society. This can lead to break ups within nations and societies.
With elections looming large, the government has tried to create a facade through the latest budget as if it is serious about reaching out to the common man. The reality, however, is a different matter
Pakistan is definitely headed this way. The rich have their own housing societies, sometimes with high walls surrounding these. They have their separate private schools, hospitals and recreational facilities. They have separate means of transport and they increasingly do not depend on state-provided facilities, even for infrastructure (roads, sewerage, garbage collection, telephony), and protection as well (guards). Apart from the increasing isolation of groups, this separation also leads to less effort, on the part of society and government as a whole, about meeting the needs of the poor and those who have been left behind.
Our public school system, public health system, justice and police systems are all excellent examples of what happens as a result. It would have been interesting to see what public schools would have been like if the children of ministers and generals would have been asked to enrol in these. The same goes for other state-provided services as well.
Though there are causal links between the growth strategy being followed in Pakistan and the higher inequality resulting, and some research shows that there might even be a necessary connection, that does not imply that governments cannot do anything to address the issues related to inequality and marginalisation. By having a different redistribution of income through progressive taxation (higher income tax for the rich, gift/inheritance tax, wealth tax, tax on luxury items and so on), restrictions on regressive taxation (sales tax and other indirect taxes), redistribution of assets through land distribution to the poor, better asset-building services to the poor (especially health, education and skill training) and better infrastructure facilities (access to gas, electricity, water, sanitation and etc.) that allows a higher quality of living for the marginalised and the poor, we could have a more even distribution and development could be shared by all.
It is important to emphasise what is being said here. The society has a choice to make — if we are a society, if we truly care for each other, we have to ensure that most people are included in nets that we create, most have a stake in this society. If not, and this is what we seem to be saying right now, the existing trends will continue and will become even worse.
The crux of the problem is that a) the government is not realising the necessary connection mentioned above, b) or if they do, the interest groups in power do not want to do anything about it, c) the government is not realising the danger of the route they are taking, and d) they are not realising the importance of the change that needs to be made. The evidence for the first two, regarding the ignorance or interest group basis of the current government has to do with the kind of palliatives that the government has offered in the recent proposed budget.
The government claims that they have proposed subsides worth Rs100 billion or more in this budget, in addition to salary increases and other benefits for the poor. But if we analyse the subsidies and incentives, we find the government’s claims to be shallow and incorrect. But, more importantly, it shows that either the government cannot see the importance of more fundamental changes or it is unwilling/unable to make these changes. Many of the subsidies (on electricity and wheat) are not new, many others (electricity, cement, and sugar) are not really meant for the poor, and many (pulses and sugar) are not targeted at the poor.
The government could not ensure implementation of minimum wage at Rs3,000 per month for most of the labour, raising it to Rs4,000 per month with no change on the implementation side is not going to help the poor in the real sense. The relief announced for labour, in the form of better benefits, is going to help some four percent of the labour force in Pakistan, and the part of the labour force that is skilled and so does not usually fall in the category of the poorest.
On the other hand, the government has lowered taxes on the rich, it has not brought back the wealth tax, has increased the net for sales tax and has lowered taxes on luxury items. The tax on capital markets and real estate markets is so low that it looks no more than a political gimmick to satisfy the critics. Furthermore, though the allocation for Public Sector Development Programme (PSDP) has been raised substantially. This expenditure is not necessarily going to be pro-poor: how can the construction of the new GHQ in Islamabad help the poor of the country? And when the smaller PSDP of last year has not been utilised fully, there are real question marks about the government being able to use the larger amount. Again the larger amount might just be an eyewash. There has also been no attempt to create new institutions or alter existing ones in fundamental ways to address the structural problems identified above.
More importantly, the larger question remains. Though the government has made a big deal out of the incentives and subsidies it has offered, there is no recognition of the need for structural changes in the economic, social and governance structures of the country. The government is still thinking in terms of handouts instead of making long-term policies to address the issues of poverty, inequality, and asymmetry of income, assets and opportunities. So the trends, regarding inequality and marginalisation, on the basis of income, assets, education, health, access to basic necessities, geography and ethnicity, are likely to continue, get exacerbated and become even more entrenched. This, if true, can only lead to a bleaker future for us all.
The government has made a big deal out of the larger PSDP, subsidies and incentives for the poor and the salary increases and so on that they have proposed in the budget. All of the above do not amount to much when you actually analyse them. But more importantly, the government seems to be unwilling or unable to realize that their growth strategy is linked to the rising inequality and disenfranchisement that is resulting and these palliatives cannot address the basic issue. For that, fundamental changes need to occur in our taxation, governance, justice, police and in many areas. The government has not made any start on these. In fact, the proposed budget, with its short-term policy initiatives, seems to suggest a further retrenchment and regression away from the desired direction. This cannot bode well for the polity as a whole.
http://www.dawn.com/weekly/dmag/dmag1.htm