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Illusions of Economic Development | Rabbia Nasir

Illusions of Economic Development | Rabbia Nasir

Numbers speak louder than words

The economy of Pakistan is such a puzzle – where the ruling elite keeps counting the mega projects going on, whereas the masses keep listing down the throes of daily life. Anyone who visits the capital of Punjab these days would be impressed by the rapid infrastructure development taking place. Anyone who visits Karachi would be fascinated by the number of multinationals operating in the financial jugular of Pakistan. While someone visiting Islamabad would be mesmerised by the Blue Area, and the recent mass transit developments. But is Pakistan really on the road to economic development? A deeper analysis would force us to argue otherwise.

“Government is simply hoodwinking the people,” said Dr Mohammad Zubair Khan, former commerce minister of Pakistan, while talking to DNA. “Ishaq Dar is simply creating an illusion of development.”

Now someone who has been consulting for the World Bank, the Asian Development Bank, UNDP and various eminent bodies would not give such analysis without sound basis. These comments therefore need to be taken seriously and it needs to be investigated why Khan and many, many others are wary of the government’s economic policy.

Mega projects, micro trickle-down

Mega projects are very visible in the Pakistan of today. Even Washington Post, a neutral publication per se, lauded Pakistan and predicted that the country was well on the way to development. However, numbers do not reinforce this claim. A look at the Human Development Index (HDI) of Pakistan would clarify just why the common man keeps whining about the lack of a desirable lifestyle.

Table 1

For those with zero knowledge about developmental economics, these figures come under the category of “Low Human Development.” Moreover, Pakistan being ranked at 146th with respect to HDI is not good news either. Whatever happened to the tall claims of being on the road to development?

Countries that sport mega projects generally claim that these mega projects will have a trickle-down effect and will be visible even in the lower strata of population. Does that apply for Pakistan?

Salman Shah, en eminent economist and former caretaker finance minister of Pakistan chooses to disagree.

“Firstly we need to see what trickle down means,” he emphasised. “Trickle-down effect is generated when there is employment generation, when unemployment is marred, when new investment comes in and when new factories are placed as a result of development on the top. From that point of view, following all these mega projects there has been no investment revival and no employment generation. So the trickle-down effect has simply not been created.”

Countries that sport mega projects generally claim that these mega projects will have a trickle-down effect and will be visible even in the lower strata of population

This is interesting since there is a prevalent notion that the current government deserves a pat on the back for its commitment and dedication to the economy. Where do these claims stem from? Dr Khan has a comprehensive answer for this.

“There are two major indicators which the government is using to claim improvement; reserves and inflation,” he explained. “As of today the reserves have reached $20 billion. However, it is all borrowed money. Now if you or I borrow money, can we say we are rich? For Pakistan, this borrowed money comes with exorbitant interest. The government has impoverished the future of Pakistan.”

“As for inflation, it has gone down to one or two percent,” he continued, giving his insight. “And there are reasons for it. One is the drop in oil prices, and it has had a follow through effect as drop in inflation. Second is the buying power going down. Bank lending is largely dedicated to government lending. Deficit financing is down and there has been an economic slowdown consequently. Both of these are not good reasons, and have nothing to do with the strengthening of the economy.”

Dr Khan, after talking about the two indicators being manipulated by the government, pointed towards the declining imports of Pakistan.

“But otherwise the economy is sluggish with major sectors declining,” he added.

“Look at exports. While exports continue to grow by 10, 15 or even 20 percent for other countries, our exports are declining. Our imports on the other hand are going up? So my question is how are the reserves increasing then?”

As for prices he pointed out an interesting fact about the decline in food price.

“Food price decline is irrelevant as most of the poor people live in rural areas and they are the producers of food already. Poverty is increasing in villages. No one says anything because of the IMF program,” he said.

It is common knowledge that many times, political animosity gives way to criticism. However what Salman Shah and Dr Zubair Khan make of the situation is objective analysis. Actions do speak louder than words, however, when it comes to financial standing, numbers speak the loudest. What we are interested in is improvement in the life of the common man. So let us look at some social indicators and figure this one out.

Figure 1: Mean years of schooling in Pakistan

A country with mean 4.7 years of schooling in 2013 does not really need a comment on the dire state of social development. A glance at the budgetary allocations of services important for development of common man from 2010 till date speaks volumes of how much the ruling class cares about problems at the grass-root level.

Figure 2

Figure 3

Figure 4: Source: Ministry of Finance website

A mere look at these graphs is enough to highlight that whatever matters for the common man is not the top priority for budgetary allocations. And the problem does not lie in the budgetary allocations only. Our exports are not very promising either.

And as if these problems were not enough already, Umar Masud, a reputable consultant of the country highlighted the inequitable distribution of resources in the country.

“There has to be equitable distribution of economic growth,” he told DNA.

“There are mega projects going on, but it is important that the economic growth is equitable. These mega projects have to connect to everyday life as well, not just infrastructure.”

While Pakistani politicians and media both have talked a lot about how smart it is of Pakistan to attract Chinese investment and how Iran nuclear deal makes it easier for us to reach Iran, Dr Khan rejected these claims altogether.

“Chinese investment has nothing to do with government policies. The Chinese have always come. Now with Zarb-e-Azb and restoration of peace, the Chinese did come and an investment opportunity has arisen,” he explained.

“The US-Iran nuclear deal won’t do anything for our economy. We will buy their goods rather than selling them anything. How would that be beneficial for us? Yes, the gas pipeline can be made. But what about the price at which the gas would be sold to us? That is the question.”

Just three participants and a handful of graphs are enough to make us realise that there is more to the picture than metro buses and laptops distribution.

“As far as development is concerned, the mega-projects are making no contribution to economic growth,” Salman Shah could not be clearer.

Oh this powerlessness

We are such a powerless state, we always have power outages. We are not able to resolve our energy crisis. Only if the budget granted to infrastructure projects and mass transit system could have been channelled towards producing cheap electricity there might be some hope.

Salman Shah was very elaborative on the energy issue.

“The main hurdle is the energy crisis and the government fails to bring reforms in this domain,” he said.

“Even NEPRA has blamed the ministry for lack of adequate policy. There are no reforms to create a market for power. There is hardly any competition and deregulation. The institutions, the DISCOS’s and the GENCO’s, fail to show enhanced performance. Line losses are there. Receivables are increasing.”

Production of electricity is not the only issue. For a developing country like Pakistan, it is also imperative that energy production should be cost effective and meet international benchmarks.

“There is no focus on hydel energy,” Shah went on. “We are generating energy through expensive means. The energy that we will generate through coal is going to be the most expensive in the world. We are a high-cost economy when compared with global markets.”

It is also interesting how Pakistan is busy running after and seeking new means of energy production while totally ignoring the projects that have been recommended since long, and whose names people of my generation have grown up hearing repetitively.

“No major dam has been constructed,” Shah did not miss this one either. “Bhasha Dam would take 10-12 years but what about Kalabagh Dam? No work has been done on that.”

Dr Khan also agreed.

“Again, the energy crisis is getting worse, so how will development take place? As long as the energy crisis persists how can we have development and growth?” He posed a simple question.

Again, this is funny how no one sitting in our policy formulating bodies could figure out that resolving the energy crisis is the key to economic growth. We could ride metro buses later, couldn’t we?

These taxes are so taxing

The next issue in our economy that is imperative for generating development revenue is taxation. Who pays the taxes and how much?

“So many taxes have been imposed that the common man is being crippled. The common man is suffering because of this.” Dr Khan pointed out.

We lie next to China and India geographically, but not economically. This is sad and we need to think about it

But why exactly is out tax net so narrow? What are we exactly missing? Umar Masud has an answer.

“In our country a parallel economy is going on and that is not being taxed. For instance, the people in Shah Almi or Brandreth Road do not give as much tax as applicable.”

Masud, however, has some hope as well. “There has been improvement though, but we need more. FBR is changing and the treatises being formed have the potential to reduce corruption and enhance transparency. Technology is imperative. We should focus more on technology solutions, and if they are applied we can eliminate corruption.”

This is the ABC of developmental economics. The government can hardly contribute to economic development unless it raises enough tax revenue. Therefore, it is time to sit down and seriously rethink our taxation system.

“Reforms, reforms and reforms”

Ok, enough problems already, so let us stop listing down more and figure out what to do next.

“The economic planning has to be more vibrant so that the effect trickles down to the common man,” Masud proposed. “It is also important that those who evade taxes and those who are not under the net must be taxed.”

Agriculture is exempt from taxation as well. Can we really tax the landlords?

Dr Zubair Khan thinks that instead of chanting praises for China or Iran, Pakistan must polish what it was given by nature. “We should focus on improving our own country and our resource development,” he stated the obvious.

Salman Shah shed light on other aspects.Oil prices are dropping so focus should be shifted to oil based energy,” he said.

“It is important to bring full capacity online, as already suggested by NEPRA. Deregulation needs to be done. New investments should be raised. There should be more competition to provide cheap electricity to the masses.”

“We need reforms, reforms and reforms,” he summed up.

Yes that is what we need. We lie next to China and India geographically, but not economically. This is sad and we need to think about it. The economic planning wing needs to sit down, thoroughly think through the situation, set priorities for the future and get to some serious work.

Source: http://www.pakistantoday.com.pk/2015/10/03/features/illusions-of-economic-development/

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