SHARED GROWTH

ISHRAT HUSAIN

        A number of media persons and commentators were pooh-poohing Pakistan’s impressive growth record between 2002-08.  The criticism against the previous government ranged from the insinuation of fudging the numbers and faking the growth rate to the other extreme where it was acknowledged that growth had indeed taken place but it was making the rich richer and the poor poorer.  The same groups are now assailing the democratically elected government for a dismal showing on growth rate.  It seems that we as a country can never get it right.  You are damned if you do it and damned if you don’t do it.

        A dispassionate analysis should lead us to ask a set of the following questions:Is growth really important and if so why? if it is, how can we achieve it on  a sustained basis rather than  in spurts and dribs. What is a reasonable or desirable rate for Pakistan to aim at? What should drive the growth process? How can  its benefits be widely distributed and shared by the majority of the population.

        Let us first look at  the historical evidence.  Pakistan is one of the few developing countries that has grown at a rate of 5 percent per annum over a sixty year period.  Poverty has declined from almost 50 percent to 25-30 percent.  During this period the population has multiplied from 30 million to 180 million, but per capita income has risen almost twelve times from US$ 100 to US$ 1200.  A country that was unable to feed 30 million people back in 1950s is exporting a surplus of 2 million tons of wheat and more than 3 million tons of rice after feeding a population six times bigger. These achievements would not have been possible in absence of the solid growth record.

        No doubt, the growth has been volatile and fluctuated widely.  The 1960s, 1980s, and early to mid 2000s saw high growth rates but the 1970s, 1990s and the present period witnessed low growth.  There is no empirical evidence to substantiate the popularly held myths that the military governments are better in delivering high growth or that external aid is responsible for most of the spurts in growth.  Pakistan has received three times more external official flows since 2008 than during the preceding four years.

        It is not only in case of Pakistan but  evidence from all over the world  suggests that economic growth is necessary for improving living standards of the people.  Economic growth is a powerful stimulus to poverty reduction but not for better income distribution.  In recent years, China and India have grown at exceptionally high rates but income distribution has worsened across regions and households.  Brazil had one of the most skewed income distributions but has improved it with only modest growth.  Therefore, the challenge is that both goals of poverty reduction and income distribution have to be achieved.  In case of Pakistan  growth will also help reduce fiscal deficit which is our number one problem at present, attract private investment and provide confidence to the economic actors in carrying out their activities.  The buoyancy witnessed in 2002-2008 period was a testimony to the beneficial effect of high economic growth but it could not be sustained due to lack of continuity and consistency of policies and unpredictability of business environment .These factors are sine qua non for sustained growth.

        What should be the future rate of growth for Pakistan?  With population growing at 2 percent per annum and a huge backlog of weak infrastructure, poor social sector services, and increased security burden we must grow at least by 5 to 6 percent a year to attain a consistent per capita income growth of 3.5 percent.  This rate will double our per capita income in two decades, absorb the incremental labor force, bring about a reduction in poverty and mobilize greater domestic resources for development.  Of course, there would be fluctuations around this mean for a variety of reasons, the most important being the uncertainty arising from the speed of change in the global economy and the challenges of the domestic economy.  It is hard to predict the external or domestic shocks that are likely to hit us in the course of the coming decades.

        What will be the drivers of this growth process?  It is highly refreshing to note that the National Economic Council (NEC) has recently approved a new framework for economic growth prepared by the Planning Commission.  The framework rightly emphasizes that to find itself a place in the globalized economy and accelerate productivity gains, Pakistan has to make a paradigm shift.  The pillars of the new growth strategy are a focus on (a) developing and nurturing competitive and inclusive markets by ensuring a level playing field for all firms and businesses;                 (b) improving productivity of the factors of production through innovation, creativity and entrepreneurship; (c) reforming the governance structure by strengthening the Civil Service, regulatory agencies and other key institutions of the state; (d) providing the basic infrastructure and public goods either directly through the government agencies or public private partnership.

        The framework sets a target growth of 7 percent annually which is feasible provided the implementation of the new strategy takes place expeditiously and uninterruptedly.  A national political consensus on this long term economic direction followed by expeditious execution of structural policy and institutional reforms and efficient implementation of the drivers of growth  would  translate this framework into a  reality.  

         Assuming that the growth does take place as outlined above, how do we ensure that the benefits of this growth are widely shared.  Pakistan is a federation in which people living in some regions, districts and communities in some of the Federating units  are living in miserable conditions  not conducive for maintaining political harmony, social cohesiveness and ethnic peace.  There should be no doubt in anybody’s mind that Balochistan, Khyber Pakhtunkhwa, FATA, Gilgit-Baltistan, rural Sindh and Southern Punjab ought to be allocated greater public resources to get rid of backwardness.  The recent initiatives to devolve powers to the Provinces under the 18th amendment and the award of National Finance Commission are highly commendable as the locus of public spending has  rightly shifted to the provinces.  But  these powers and resources have to be  further extended to the District Governments.  The devolved departments at the District should be given the necessary powers, authority and resources to respond to the needs of a common citizen. The authority, quality and attitude of Civil Servants who come in daily contact with the citizens have to be upgraded.  Thana-Kutchery-Tehsil culture has to be replaced by  a system where the officials are empathetic, responsive and competent. Narrow parochial considerations whereby the Provincial Ministers and MPAs consider the local governments to be a threat to them would keep the present inequities intact.  Without revamped institutions and effective pursuit of good governance, i.e. Devolution, Transparency, Rule of Law, and Accountability, the quest for new growth framework will remain elusive, income inequities,among various regions and households continue to persist and extremist and fundamentalist tendencies would remain unabated forcing the elites to live under constant fear for the security of their lives and property.

        How can the resources required for this pattern of growth be mobilized?  Solid foundation for resource mobilization can only be laid if all those earning above the threshold of taxable income are required to pay the taxes due irrespective of the sources of incomes.  Whether you receive income by renting your property, earning dividends and capital gains on stocks or real estate, receiving salaries or wages, from employment, making profits on your business or self employed vocation or trade you have to pay the tax according to the slab in which you fall.  It is totally immaterial whether the income is generated through agriculture, manufacturing, trade, transport, commercial activity, exports, imports or remittances.  The whole debate about documented / undocumented economy would disappear in thin air if this principle is enforced.  To file the income tax returns you have to provide documentary proof of the income.  Those who do not maintain the documents would suffer penalties.  

What are other policies besides taxation to promote shared growth? Public Expenditure Policies, Social Protection and Social Safety nets, Investment in Human Development, extending credit to micro-entrepreneurs, small farmers, low cost housing and SMEs and Rural Infrastructure projects can make a substantial contribution to improved income distribution and shared growth.

        Pakistan can emulate other successful developing countries and overcome many of the problems it is facing today if all of us are sincere in pursuing this shared growth model.