Usama Siddiqui June 16, 2005

Tags: economy , industrialization

rel="tag" href="/tag/economy">economy is. The significance of the national economic priorities cannot be understated; it can make or break the economic well being of the nation.

Poverty, as a worldwide phenomenon, is concentrated mainly among the rural population. Of the 1.2 bn. people living under $1 per day, 75% of them live and work in rural areas. Alleviating rural poverty is an ethical as well as social economic issue, as there is a huge economic potential that is untapped. The best way to do this is to focus on the agricultural sector.

In Pakistan, most of the economic reform programs launched by successive governments have not had agriculture at the forefront of their priorities. Agriculture, which still accounts for more than 20 percent of the Gross Domestic Product, and more than 50 percent of employment, has a special role in alleviating poverty, given the concentration of the poor in rural areas. Moreover, as the primary user of the natural resource base, agriculture has a central role in protecting the environment.

Agriculture has been the ‘leading’ sector to have accelerated growth in countries like China and India. Where the main productive sector is agriculture, economies will not grow unless there agricultural productivity increases.

On the other hand, a greater focus on industrialization, for a country like Pakistan where the majority of the labor force is unskilled, raises the unemployment rate. In addition, it results in a skewed distribution of income, and exacerbates the economic disparity among the various strata of the population. Finally, industrial growth is harmful for sustainable development as it causes widespread environmental deterioration.

Economic policies of our government in this regard have left much to be desired. We have seen instances where the government concentrated resources on non-profitable ventures instead of focusing on areas that directly affect the economic well being of the common man. One such example that comes to mind is the significant government investment and subsidies for the oil-refining sector. Refineries have been traditionally guaranteed a minimum 10% Return on Equity (RoE), as a result of which they have consistently enjoyed healthy, engineered profits. The introduction of a deemed duty element in the pricing mechanism in 2002 that replaced the guaranteed Return on Equity has further enabled the refineries to record windfall profits. These subsidies and duties, asides from being a drain on the national exchequer, have also resulted in higher petroleum prices for the end customer (for diesel, the deemed duty raises the end price by 6%). There is no justification for the common man to bear the burden of the refineries’ profitability. The average consumer has had to pay up to 51% of the end price of petrol in taxes in recent times.

One of the refineries has been guaranteed a minimum 25% RoE, which compared to the returns banks offer (LIBOR+1%), is grossly high. In a poor country like Pakistan, this again is gross injustice for the end consumer who has to consequently pay for it in the form of higher petroleum prices.

The share of agriculture in growing countries has been declining. The major reason for this is that industries have been developed at the cost of the agricultural sector. Levying of agricultural taxes and the draining of production surplus are two examples. Agricultural growth will depend on the country’s ability to promote growth through one or more of the factors that decisively influence productivity: research, extension, rural infrastructure, education, institutional changes (market liberalization, availability of rural finance, improving the working of input and output markets), and structural changes such as improving land property rights or land distribution. The adoption of improved techniques increases agricultural output and revenue.

The first burst of growth has to be broad based and affect a large number of the rural population. It also has to lead to an increase in the consumption of the now larger volume of agricultural commodities and the increase in income has to be spent mostly in the rural areas themselves so it can generate induced non-farm employment. This will generate increases in the assets that the rural population has. And this is essentially the only way one can sustainably reduce poverty.

Agricultural growth not only helps reduce poverty and increase farmers’ incomes, it also keeps domestic prices for staple foods stable, shifts production to high value intensive agricultural commodities that stimulate demand for agricultural labor, and generates non-agricultural employment as a source of income.

It is about time that the fiscal policy of the government be given a strategic direction. A shift in focus from unfeasible business sectors towards more sustainable sectors is the need of the hour. Only then can we realize the vision of Pakistan as a prosperous, growing, and an economically sound country.