Pessimism with Growth, Why?

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OP-ED: A social miracle? —Andleeb Abbas

According to Bourguignon redistribution of poverty can only be done under exceptional circumstances, which often involves political violence and can hardly be considered an economic policy option

The Pakistan Economic Survey 2004 makes some interesting revelations. It lists wonderful economic achievements: the economy has progressed and nearly every imaginable indicator has made robust progress. It appears the government got a little carried away by this feel-good factor. Consider.

Based on the findings of the survey, the finance minister made the stunning announcement that the incidence of poverty in the country had decreased by a good 4 percent. The logic behind this achievement is the old-fashioned economic theory that growth eventually has a trickle-down effect and reaches the poor masses.

The interesting fact is that even the proponents of this theory i.e., financial institutions like the IMF and the World Bank, are revisiting this theory. In a recent presentation aired live at the World Bank Islamabad office, Dr Bourguignon, a French national, presented a contrary view. He claimed that growth alone is no panacea for alleviation of poverty unless such growth is accompanied by redistribution of assets and incomes in order to enable the poor to accumulate financial and human capital.

Bourguignon is the author of a recent book on the impact of economic policies on poverty. His presentation was particularly relevant in the context of Pakistan, a country where land reform is the most pressing issue and which presents a typical case of negative linkage between growth and poverty alleviation and employment generation. As we see in the latest economic survey, GDP has increased by 6.4 percent while unemployment has reached a historic high of 8.2 percent.

According to Bourguignon redistribution of poverty can only be done under exceptional circumstances, which often involves political violence and can hardly be considered an economic policy option. Illustrating the negative correlation between wealth inequality and economic growth, Bourguignon said if rich individuals in a society have access to a credit with a rate of interest of 10 percent, while the poorest face a 50 percent interest rate, all projects with a rate of return of 10 percent or higher will be undertaken by individuals in the first group.

If, however, some wealth were redistributed from the first to the second group, poorer individuals would have less need to borrow and could undertake projects promising a rate of return slightly below 50 percent. In this case, redistribution from the rich to poor would actually generate more investment and/or a high rate of return of capital with benefits accruing to the beneficiaries as well as the society. For example, the poor people cannot offer their children good education, cannot obtain loans to start a business and cannot afford insurance, however profitable their enterprises may be. Countries with a high poverty headcount or an unequal distribution of wealth, thus under-utilise their productive and growth potential to a greater degree than countries with fewer poor people or with a more equitable distribution. This equation thus also results in sub-optimal investment levels.

The countries that experienced the sharpest drops in growth after 1975 were those with divided societies and weak institutions, crippling the ability of their political system to respond effectively to external shocks. As is also the case with Pakistan, these countries failed to invest in human and social development when growth was taking place.

The present budget of Pakistan is definitely a growth-oriented budget, but again, at the expense of social development. Education still has a less than 2 percent of GDP allocation and health less than 1 percent. Figuratively the PSDP budget has been increased to Rs 202 billion, but does this numerical increase correlate with an increase in development indicators. Sadly no. Analysis reveals that almost Rs 60 billion of the PSDP budget allocated last year lies unutilised, while the funds which have been put to use have not materialised in any social benefit as bureaucracy and corruption have retarded their progress inevitably.

The recent economic survey also shows that while the literacy rate has improved, female literacy continues to lag behind male literacy; health indicators remain dismal and the agri-sector has suffered a serious setback. All these indicators lead to an increase in poverty. Even so the finance minister claims that poverty has been reduced. How can that be explained?

There may be two ways to explain it. As they say miracles do happen, and that is why this phenomenon defies any logical analysis, or, as my wise colleague once said “there are lies, there are damned lies, and there are statistics”. We, as people of deep faith in the powers of our economic managers hope and pray that the first possibility is true.

Andleeb Abbas is a development consultant and an analyst

Urstruly,

As late as 1946-47, the JI, JUH, etc, were against Pakistan and Mr. Jinnah. So when was this Hindu nationalism suffocating? Quite a few learned ``maulanas`` were more than happy to join Congress and, post-Partition, Congress enjoyed a muslim vote-bank for many years. Don`t forget, it was Gandhi who helped popularize the Khilafat Movement in India and Mr. Jinnah who was opposed to it.

Given your views on the repression of Muslims in India, would you be in favor of (say) the free availability of pork sausages in shops in Pakistan for our Christian fellows? Isn`t the non-availability of pork in Karachi as much a sign of Christian ``suffocation`` as was the ban on cow slaughter a sign of Muslim ``suffocation?``

+++++++++++

Ijaz Gul,

Re: macroeconomics and the exchange rate.

Yes, exchange rate fluctuations can cause seeming havoc with GDP comparisons and this is one of the things that PPP is supposed to fix. However, it is better to use a three year moving average of market exchange rates to calculate GDP than to use PPP. IIRC, the World Bank uses something like this in its Economic Atlas.

Fuzair #75: ``I assumed your antiamericanism here because you refuse to acknowledge the importance of the US to Pakistan (economically speaking). Shall we call a truce?``

You have given up too easily. I was expecting a better fight. :-)

I think you picked the wrong topic on which to oppose my views. Because, like you, I do acknowledge the importance of US to Pakistan. Perhaps the only difference is that, I don`t consider it the deciding factor. Not even close. And I don`t consider it all good. USA maybe more important to Pakistan, than Dubai and Senegal. But not more important in Pakistan`s progress than Punjab and Makran etc.

Secondly, I think the USA has harmed Pakistan, when it wanted to also. So the net affect is neutral. And it has gotten a lot in return as well. Like a good businessman, it has gotten significantly more than it has given. This is how foreign policy works.

What I disagree with is when people try to paint any economic success of Pakistan, due to a direct relation to USA. It is as wrong as blaming Americans and Jews for every problem in Pakistan......

Anyways. Another day..........

and

Michalel Moorer for President!!! (this should give you an idea of where I stand. I don`t hate the USA. I just belong to the npr and democracynow crowd).

Growth at the rate of 1.1% of the GDP is consequent to the enlargement of the country in terms of population, sone development, inflation etc. This takes place even if the state does nothing. Thus an increase in revenue by 60-70 billion is no great feat on the part of CBR, It is there by default. It is only if the GDP grows by a percentage higher than 2% that one could feel assiured that yes some development has taken place.

Yes there is a direct linkage in the trade deficit with the money sent by the expats.The ministry of finance treats it as exports of manpower and the money is credited for budgetary puroses to this head. In actual fact, the genuine exports may have declined.

One fact cannot be denied. Monetary slippages in military rule are less.

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Re : romair # 37
“People, specifically Indian commentators (for some reason), tend to overvalue the influence of the USA etc. on Pakistan`s economy.”

I don’t know the influence USA has on the Pakistani economy. But Pakistani economy has done well only when a Pakistani dictator was serving US interests in the region. My theory is the money sent by Pakistani expats pays for the trade deficit that Pakistan has and you see growth when there is some extra money coming in.

Faruk

Fuzair

and I think that Pakistan was not created directly for religious reasons either. I think it was the natural and inevitable consequence of unaccomodating Hindu Nationalism. There was not a single Muslim religious party that felt threatened in united India; as a matter of fact they were more comfortable with the idea of a united india until Hindu Nationalism suffocated everybody.

Fuzair,
I would disagree with your first sentence. The UP movement, later followed in Bengal arose out of the direct implications of political economy. Muslims felt that pluralism and inclusivity were not being followed and that they were not getting the correct representation in the legislature and jobs. At the same time they were also weary of JI and JUI. So the basis of division was more a case of political economy than religious zealotry. Mind set of Qaid on this subject was clear.

Macro economic indicaters can be deceptive and short lived. It like making a parlour on the top floor with poor load bearing walls on the ground. The contrast makes it a bubble economy.

Cheerios

Urstruly:

I don`t think that Pakistan was created for direct economic reasons, merely indirect ones in so far as the `salariat` of the UP did not want more competition from the Hindus in an independent India. Under the British, divide and rule, they were favored for government jobs. Similary, the Bengali Muslims of West Bengal did not much care for the Bhadralok (sp?), the Hindu Bengali gentry of unified Bengal. It is a fact that the areas that are now Pakistan were the least interested in Partition and the Punjab was more loyal than the Viceroy. Its one of the great ironies of life that the Punjab and parties such as the JI have now taken the Theka of patriotism in Pakistan!

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Nikki777,
Don`t know why the CIA uses PPP since it is really only good for living standard comparisons, not actual GDP but I suppose they have their reasons. The following is a more accurate comparison. You will see that India is only roughly comparable to Australia, which ranks #17 on your chart.

Countries 2002
Australia 409,420,201,984
Belgium 245,394,571,264
Brazil 452,387,078,144
Canada 714,327,261,184
China 1,266,052,104,192
France 1,431,277,535,232
Germany 1,984,094,928,896
India 510,177,247,232
Italy 1,184,272,744,448
Mexico 637,202,661,376
New Zealand 58,580,910,080
Pakistan 59,070,992,384
Portugal 121,594,609,664
Saudi Arabia 188,479,045,632
Spain 653,075,152,896
Sweden 240,312,729,600
Switzerland 267,445,141,504
Turkey 183,664,852,992
U Kingdom 1,566,282,874,880
U States 10,383,100,215,296
Source: World Development Indicators database

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Romair:

I assumed your antiamericanism here because you refuse to acknowledge the importance of the US to Pakistan (economically speaking). Shall we call a truce?

TTFN.

fuzair #59: ``While there may be little that is anti-American in your #37, I`ve read enough of your posts to know your general views on this issue. That is why I said that your anti-Americanism is seeping through.``

You seemed to have softened your stance quite a bit, after I provided some quotes from my reply. Initially you called my reply, ``Nonsense`` and, ``anti-Americanism.`` Now you have made a general statement that, ``you know my general views on the issue.``

My general views on the issue are as follows, and I have been stating them for years now, on this site. I don`t think, overall, historically, the USA has screwed or helped Pakistan. It has helped it when it wanted to and it has screwed it when it wanted to. The net affect is that it has been quite neutral towards Pakistan.

I truly fail to see how this equates to anti-Americanism, ``seeping through.`` Could you highlight?

I do think the USA has thoroughly screwed various Arab countries, South American countries, and some others. I am not the only one who thinks that. Much of the world does. And I think it is thoroughly screwing Iraq at the moment. The population of only two countries in the world, supported the US war on Iraq (Israel and USA), which resulted in 10-15,000 Iraqis being killed. Everybody in the world, of all religions and nations, and not just I, are very critical of the USA at the moment. And for mostly the right reasons. Are all these individuals anti-American?

In fact, I have never quite understood the logic behind declaring someone anti-this and anti-that. It is the easiest way to stifle debate and criticism. It seems to have been inititiated by Isreal and is now been picked up by the USA. Anyone who criticizes anything Israel does, or Jews do as a community, is declared an anti-Semite. And once that happens, you are screwed. So much so, that one cannot even use the terms Jewish lobby. One has to use the more politically correct term, ``pro-Israeli`` lobby, when critiquing any human rights violation supported by Jews, as a group. Even though Jewish lobby and pro-Israeli lobby are basically the same entities.

Now, the USA supporters seem to have picked up on it. On Canadian channels, every argument of the pro-war brigade has been proven a lie. So they rely on the last argument of the one who has no argument. Anyone criticizing USA is now declared, ``anti-American.`` Thats it. Argument over, i.e. people criticizing the USA are doing so, because they just hate the USA. Not because the USA has done something wrong.

Does a person become anti-American, just because he does not give the USA credit for certain accomplishments of other countries?

As for the debt rescheduling: You are stating what I originally stated, i.e. it was a, ``big help.`` I never doubted that. In fact, I stated it, even before you did. However, it was from international institutions, and there are various other countries that could have stopped it also. Why not consider them also? Especially since the USA had something directly to gain from Pakistan, while those countries did not.

Having said that, the debt rescheduling was not a gift to Pakistan. In return Pakistan was to provide certain facilities and carry out certain actions. It was thus an even exchange. Considering the fact that one attack planned by Khalid Shiekh cost the USA upto 105 billion dollars, I would say the USA got a pretty good deal, just by him getting caught.

Wouldn`t you agree?

So once again, for the record, I don`t think the USA has screwed Pakistan. At the same time, I don`t think it has gone out of its way to ensure Pakistan`s prosperity, either. So it neither deserves blame nor credit, for where Pakistan is at today. Pakistan has screwed itself, and it has prospered itself..........

Ijaz Gul

I agree with your post. The first rule of capitalism is that the money always flows towards the safety. Pakistan cannot encourage investment, even by its own people, thru mere propaganda. This said `Safety` does not come thru brutal police actions, ``counter-terrorism measures``, ``operations`` on your own people, coercion and lies. The safety comes thru a political process, with strong legislature, with strong trade unions, labor laws, strong judiciary and a government that has been elected fairly and constitutionally. I mean you can make a chutiya out of an illiterate who doesn`t read newspapar by this propaganda anyway but cannot make people to trust you with their money.

The outside influence to keep us in financial ruins cannot be ignored. A clear indicator as to when a third world country is actually doing really bad is when IMF and World Bank start issuing certificates of good character to that country. Currently, Malaysia and Argentina are both in the bad books of IMF and WB since both have told IMF and WB to take a hike. After 7 Prime Ministers in Argentina it has only started doing well after its current PM has told IMF etc to get lost. Unfortunately, currently Pakistan is in the good books of both IMF and WB. Allah Khair kare.

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Dost Mitter and urstruly,
Please read S M Burke`s ``Mainsprings of Indian Foreign Policy`` Princeton University Press.

Why Pakistan`s economy finds difficult to take off is due to the unfavourable investment climate.

Law and order in Karachi, proliferation of terrorism, bad tax policies, over regulation by the state and its abject to act as a facilitator shun away even the domestic investors. Resistance to change in the system is inimical and there is no one to revamp the system on the models of Singapore, Malaysia, Dubai etc. Most economic Czars also carry a red passport and could not care less.

Having said this, I maintain that we still have a vibrant unregulated sector whose future is pinned to the country. After all DEWAN were mere Landa Bazar traders 40 years ago. Today they are the most dynamic in Pakistan. Their best advisor and think tank is niether from Harvard nor London School of Economics. He is one Raja Walayat, a total illiterate who began as a cleaner and is now on top of the chain.

Yes there are many who have invested heavily in ME and ASEAN. They went where ever the flow of money took them. This is an unfortunate aspect of capitalism. It tends to be unpatriotic.

As Christ said, ``Man cannot live by bread alone`` , we as Pakistanis cannot live by patriotism alone. Nothwitstanding our levels, some must act as visionaries and critics, both crucial to the functioning of the state. All is well syndrome has already cost us dearly and we must accept that we seriously erred in the past. We have to get out of the self created myths and move into the streets of REALISM. Then we will become street wise.

anil#67
Maybe that was an unwise remark as I do not know the details of the situation. But here is my reasoning. Regardless of the revaluation of its rupee, Pakistan could not charge more for its commodities than was available in other countries. India in all probability wanted to protect its consumers by forcing Pakistan to pay the same price as was availble to Indian sellers of the same commodity; it served the interests of the consumers of those raw materials but not of the producers of those materials in India, as the Indian producers were not allowed to export their products and receive international price for them.

It helped Pakistan`s nascent industry, since by forcing Pakistanis to pay more for their goods imported from India, it effectively provided a protection to the Pakistani industry.

I am not quite certain of the timelines of the changes in the relative value of the two currencies. I presume after the commodity boom was over, Pakistan had to devalue its currency in order to compete with Indian and other exporters in the world markets.

Urstruly at # 52:

``Shouldn`t it be much better to coerce those billionaires who are already living (and owning) in Pakistan to invest in Pakistan instead of Singapore and Dubai? How can you convince outsiders when the locals are not? ``

Yes, that would be much better, but under free economy, its not possible. People make economic decisions that suite them financially and Pakistani businessmen are no exception. Our Government is trying in an indirect way to encourage these businessmen to invest in Pakistan rather than abroad (e.g Government is trying to boost economy through governmental expenditure on develpment). The Government finds following obstacles:

1. Regional problem: ``Taliban and Al qaeda `` remnants in Pakistan. Military operation against them and their counter-attacks in Karachi do not help us. Besides, Pakistanis are pessimistic ourselves. Instead of siding with stability and continuity of policies, they want us to challenge the USA on its verious policies.

2. Some tribals of Balochistan do not want any development in their province. Hopefully, strike against Nek Mohammad will send a good signal to them as well.

3. MMA`s strategic vision for NWFP and Balochistan gets changed every year. Please recall heated budget debates in NWFP assembly. The MMA`s Government sat different priorities for next 4 years last year and they changed them completely this year.

On another front, the Government believes that fdi in Pakistan will increase once stability returns. My point of view is different. It won`t, not until the quality and quantity of Pakistani diaspora improves significantly.