Ipss Political School Aug 08 - Economic Structure

Basics of Political Economy GDP - A measure of economic activity. Gross Domestic Product (GDP) is a measure of National Income. It is the total value of all goods and services produced over a given time period (usually a year) by a country. It excludes money sent from abroad by citizens. Economic Growth means the increase in GDP. • GDP = C + I + G + X – P C = consumption – what people spend, I = investment – what people save to invest, G = government spending , X = exports, P = Imports The higher the ‘I’, the higher the chances of better future through investments in education, health and employment generation. Pakistan has a Low savings rate compared to China or India. Fiscal Policy: The government generates revenue for itself through taxes and spends this money over the course of the year. A Fiscal Deficit (Budget Deficit) means that the government has spent more money than what it has generated through taxes. Thus the government will have to take loans from domestic or foreign sources and also pay interest on it the next year. An important part of fiscal policy is the tax structure – a progressive structure means that the government taxes the rich more than the poor? A regressive structure means that poor are taxed more than the rich. Currently in Pakistan, only the salaried class pays taxes while businesses (including small shop keepers) usually don’t, thus Direct Taxation (taxation on personal income) is extremely low. To generate revenue, the government charges Indirect Taxes (Sales Tax) which is regressive as a person who earns 5,000 or 50,000 will pay same amount of tax, but in reality the poor pays a much higher %age of tax to income. Pakistan generates 70%+ taxes through indirect tax. Pakistan has a big black/parallel economy (corruption, drugs) Budgetary Allocations: It is also important to understand the breakdown of G – government spending. Is the money being spent on security - arms, atomic bombs & missiles or is it being spent on education, health & sanitation. Labor Structure: It is also important to note that 70%+ people in Pakistan work in the informal sector and thus are not impacted by increase in government’s minimum wage as Minimum Wage only applies to people who work in factories/industries where labor laws apply. While in agriculture, domestic workers, daily wagers & small entrepreneurs, minimum wage does not apply as their wage is purely market based. The more people, the less the pay. Thus population increase is an important factor which is seldom discussed. Capitalist, Socialist: Competing Visions: The descriptions are generalized and current economies are a mix of these visions. Capitalism means that people have the right to Private Property & Free Enterprise (they can start/run a business). It promotes an individualistic structure and leads to Liberalization of the economy (Privatization of state enterprises and letting the market dictate commodity prices rather than the State fixing it) and Free Trade / Globalization (removal of Tariffs - goods can move from one country to another without any taxes on imported goods). The socialist vision argues for a collective structure including state owned enterprises (& prices decided by the state) and restricted trade (Import Substitution - A government policy when the government attempts to replace imports with domestically produced goods) From a capitalist perspective, one argues for Trickle down (The process whereby economic gains from economic growth pass down through entire society ending up with the poor) to improve the conditions of the poor. From a socialist perspective, to improve the conditions of the poor, Redistribution of Wealth (taking money from the rich to give to the poor as state policy – land reforms etc.) is required as wealth is highly concentrated and trickle down does not work. Capital Intensive vs Labor Intensive: A process which requires a higher proportion of capital (money, investment, machines) to labor is capital intensive. Agriculture before tractors was highly labor intensive. The car industry is more capital intensive than the textile (sewing) industry. For countries with high unemployment & huge populations, it makes sense to invest in labor intensive industry to generate more employment. Pakistan has no Balance of trade as Import > Exports. To pay for extra imports, money is used from what Overseas Pakistanis send, from FDI (foreign direct investments). If it still does not balance (balance of payment), it will eventually lead to devaluation of the rupee.

Time for land reform By I.A. Rehman

THE chapter on agriculture in the latest Economic Survey begins with a plea to “developing countries like Pakistan to get their acts together and benefit from the current situation by giving more serious attention to agriculture”. The advice is especially relevant to Pakistan because “agriculture is still the single largest sector, contributing 21 per cent to GDP and employing 44 per cent of the workforce. More than two-thirds of Pakistan’s population lives in rural areas and their livelihood continues to revolve around agriculture and allied activities”. This opening paragraph of the chapter takes note of poverty in Pakistan being largely a rural phenomenon; “and, therefore, development of agriculture will be a principal vehicle for alleviating rural poverty.” (And, of course, the global food crisis is offering Pakistan opportunities to get richer by exporting more food). What is to be done about agriculture and for the well-being of the 44 per cent of the workforce and the twothirds of the population? While asserting that “agriculture will continue to acquire the highest priority from the government”, the Survey merely advocates a shift towards yield enhancement and attention to farm needs. This analysis is characteristic of the policy various governments of Pakistan have followed, that is, to make agriculture more productive in the interest of the national economy. The interest of two-thirds of the population is not the focus of government thinking. It is assumed, despite evidence to the contrary, that if agriculture shows a good rate of growth the rural have-nots will automatically receive windfalls. The most critical omission in official thinking was pointed out by a perceptive journalist in this daily: “The minister evaded the issue of land-holding structure in rural Pakistan that has been identified by economists and a report of the agricultural reform commission as the major hurdle to increasing agricultural productivity.” It is not surprising therefore to find the volatility in agricultural growth (1.5 per cent to 6.5 per cent over six years) attributed to vagaries of nature, losses caused by pests and use of adulterated pesticides, and that no reference is made to the plight of small cultivators and landless tenants. For promotion of agriculture reliance is placed on the inputs formula in vogue since the 1960s. Steps will be taken to ensure greater and better utilisation of fertilisers, improved seeds, machines, plant protection, better irrigation, and disbursal of larger amounts of credit to farmers. Again, no mention is made of the millions of men and women who toil against heavy odds except for a reference to an initiative for “upgradation of socio-economic conditions of the fishermen’s community”. There is need to seriously ponder the contribution to stagnation and reverses in agriculture made by the cultivators’ lack of ownership of the means of production. The fact is that small landowners, tenant-cultivators and the voiceless haris have been abandoned to adjust themselves to the vagaries of the market, deadlier than the vagaries of nature. Largely denied the guidance of the once efficient extension services, the under-privileged farmer is changing crop patterns, in panic, that produces results such as replacement of wheat cultivation with sugarcane, unions or tomatoes. It is time the impossibility of moving forward without raising the status of the cultivator was duly appreciated. That will lead to the urgency of land reform, which was high on the national agenda for decades till the Zia-created religious courts issued the incredible verdict that land reform is unIslamic (because one of the regular judges of the Shariat Appellate Bench joined the two ulema-judges to produce a retrogressive decision by majority). The way peasants were subsequently forced to give up lands acquired under land reforms — by force in Pakhtunkhwa and by legal chicanery in Punjab and Sindh — is a matter of abiding shame for all conscious citizens of Pakistan. Land reform was always advocated on two premises — one economic and the other social. The economic For IPSS Political School

argument was that smaller owner-cultivated farms achieved higher productivity than large farms operated by absentee landlords. This view has been challenged by advocates of mechanised, capital-intensive farming on huge tracts, (including corporate farming). They are not concerned with the consequences of displacement of hundreds of thousands of tenants without any prospects of alternative employment (decent and gainful). However, one may concede that the economic grounds for land reform can be re-examined. But, nothing has happened to reduce the force of the social argument for land reform. A system of self-cultivated farms is required to break the suffocating rule of feudals who prefer dictatorship to democracy, obscurantism to ijtihad, and rule by force to supremacy of reason. Land reform is also necessary to pull a large body of citizens out of medieval bondage, help them realise themselves, and thus avoid the huge loss of human capital Pakistan incurs year after year by denying the people their basic right to land. The case for land reform is as strong as ever. The food crisis lends the matter greater urgency. That something can be done to alleviate the misery of tillers of the soil short of an over-arching land reform cannot be denied. The many sound proposals in this area include a plan to abolish bonded labour in agriculture not only in Sindh but also in Punjab, the International Labour Organisation — supported move to settle homeless haris in new villages, settlement of cultivators’ claims on military farms in Okara and elsewhere, creation of education and skill-development facilities for hari/kisan children; unionisation of agricultural labour, et al. While such measures are welcome, they will only ease the rigours of the archaic land ownership pattern Pakistan has maintained at a terrible cost to the present and future generations. They cannot be a substitute for land reform. Perhaps this is an appropriate time to plan land reform, not merely in terms of revision of land ownership pattern but also, and more essentially, in terms of land utilisation practices and social justice to a large mass of people. There may still be in the PPP some who could own the legacy of Zulfikar Ali Bhutto. Nawaz Sharif and Shahbaz Sharif also have been known to favour land reform. At least they did so a few years ago when they asked the World Bank to present the case for land reform before the members of the Punjab Assembly.

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Why poor people continue to stay poor?: An end to poverty? By Tasneem Siddiqui (taken from www.dawn.com) Starting from early fifties, when a large number of Third World countries got their independence, most of them failed to start an indigenous process of development. Almost all of them equated modernization with rapid industrialization, and ignoring the historical experience and cultural differences, started aping the West. Consequently, they got the sequence of development process wrong. In Pakistan and elsewhere the major flaws of the development strategy were: a) industrial development without adequate agriculture development; b) large-scale industry without the prior development of small-scale industry; c) urbanization outpacing industrialization; d) services growing faster than the productive base of agriculture and industry, and e) population growth racing ahead of employment growth. Our other failures were: We tried to adopt the 'welfare state' model (free education, free health service, free rural water supply, free sanitation) without having a broad-based taxation system like the Scandinavian countries or huge natural resources like Kuwait and Brunei. Because of lack of vision and poor implementation mechanism services were not delivered, but huge amounts of scarce resources were wasted. Major chunk was siphoned off by the consultants, engineers, contractors and bureaucrats. Some services were no doubt delivered, but it created a 'dependency syndrome.' In spite of our failure in improving the social indicators, we did not learn the lesson that you cannot run a welfare model with borrowed money. We involved the state in almost all activities, although it had neither the capacity nor the resources to perform those jobs. At the same time, instead of devolving the authority to the lowest level, we placed heavy reliance on an over-centralized bureaucracy. Its hallmark: it is multi-layered, underpaid, over-staffed, inefficient and corrupt, and keeps on expanding exponentially. By its very nature it is status-quo oriented, slow moving and stifles the initiative of the people. (De Soto counted over two dozen government departments which had to be approached for seeking permission to start a small factory. In Pakistan the number of labour laws which are operated in the name of welfare of the workers are 27). Due to poor targeting, most poverty alleviation schemes seldom reached the needy. They were hijacked by the middle classes and the influentials. Lessons learnt from past experience: a. Don't treat 'alleviation of poverty' as a sector. How can you expect to reduce poverty by launching a few programmes, while all other macro policies continue to increase poverty; b. Don't start grandiose programmes and projects to help the poor. They never work. Start small, scale-up and mainstream gradually; c. Don't believe that massive foreign aid can lead to poverty reduction. IMF/World Bank are not the solution. As a matter of fact they are part of the problem. The thrust of their strategy lies in the obligation upon the aidreceiving countries to align their own economic policies with the requirements of the IMF/World Bank, to develop themselves as they want these countries to develop. Dependence on the aid-giving agencies has created a new type of 'poverties' and in many cases has resulted in an erosion of sovereignty and destabilization of societies. Sustainable development is only possible through local resources which can always be found if the programmes are participatory in nature and low in cost; For IPSS Political School

d. Don't use soft programmes/subsidies to solve social sector problems - they will not be sustainable in the long run. (If properly targeted and effectively monitored, subsidies can be effective in specific programmes but normally they are grabbed by other than target groups). e. Don't believe that the NGOs can replace the government - they can at best quicken the process of social mobilization; can do intermediation between the state and the poor; carry out research to find low-cost solutions; implement pilot projects and test their viability, but the ultimate responsibility rests with the state. State cannot abdicate the responsibility; f. Don't believe that people are ignorant of what is happening around them. As a matter of fact the most profound thing that has happened during the last decade is the easy access to the knowledge that things have changed elsewhere; g. Don't believe that the poor can continue to be befooled. There is widespread frustration about the gap between the rich and the poor. People are seething with anger against the inequitable distribution of resources. Currently, they are not organized but they have the potential to destabilize societies which are resistant to change; h. Don't believe that community participation means that people participate in government programmes. It should be the other way round. Government should support what the people are doing. We need to recognize that: Poor people do have assets, but in most cases they do not have formal title. In rural areas, the land they till, the place where they live, the tools they use, the cattle they own, cannot be transformed into capital because of lack of title. Similarly, over 35 per cent of urban population lives in kachchi abadis (squatter settlements) but in most cases they do not own that land legally. This is a huge resource, but because poor people rarely have formal title, they cannot use these assets as collateral to raise cash; * In urban areas of Pakistan, the informal economy is bigger than the formal one. (In Karachi for example 70 per cent of the economy is informal). No effort has been made to formalize the informal, link it with the market, improve its productivity and create mortgageable assets for the poor; * The main reasons for extra-legal businesses and squatter settlements in Pakistan not becoming legal are bureaucratic apathy, cumbersome procedures and corruption. The path of the poor is blocked by the officialdom at every step; * Pakistan is an over-regulated country. Government not only regulates, but tries to control most of the business and trade activities. Whether it is purchase of land from the government, sanction of an electric connection or permission to start a new business, it may take years. Harassment at the hands of tax collectors is another tale. The cost and burden of this 'over-regulation' makes most businesses uncompetitive and difficult to run; * The cost of running the country has increased to a horrendous level. Now it consumes about 95 per cent of our revenue income. If we continue to spend 25 per cent of our income on defence, about 55 per cent on debt servicing, 15 per cent on bureaucracy and intelligence services, how can we meet the rising demand for social services? While devising poverty alleviation strategy following points need further emphasis: i) It must be admitted that conventional methods to eradicate poverty won't work. Similarly, it must also be accepted that in the social sector, government cannot do everything. It has neither the capacity, nor the resources to do so. In Pakistan, the problem is neither shortage of funds, nor lack of skilled manpower. The main issue is poor governance and poor management; For IPSS Political School

ii) Grass-root reality needs to be studied and its result accepted with open mind. It must be admitted that people have been surviving in spite of the state, not because of the state. The initiative of the communities, and small enterprises in solving their problems needs to be supported and supplemented. They do not expect much from the government. What they need is an enabling environment, and availability of research-oriented technical support in solving their problems. iii) Smaller things in the following sectors should be left to the people and their associations. There is empirical evidence that they can undertake these activities on 'self-help and self-managed basis' with the support of cooperatives and community-based organizations: Check dams and water management - agriculture cooperatives - rural water supply - sanitation and solid waste management - agriculture cooperatives - rural water supply - sanitation and solid waste management at lane level - housing - basic health - education at primary level - family planning - social forestry - savings and credit societies. What they need is technical support from the professionals and space for social mobilization. Bigger things like big dams, trunk sewers, treatment plants, water source development, making land available for housing, and big hospitals, colleges, universities etc. should be the responsibility of the state. To implement this approach structural partnership based on the concept of component sharing needs to be developed; iv) The myths and misconceptions about the poor that: i) they are not organizable; ii) they are too poor to pay for the services; iii) they are not bankable (they will not return the money if given to them in small loans) and iv) they do not want to change their lives, need to be thrown in the dustbin. There is empirical evidence across the globe to disprove these myths and misconceptions; (v) We must now go beyond the rhetoric of creating awareness, capacity building, advocacy networking and running training courses - the much-touted strategy advocated by the NGOs and donor agencies. What people need are low-cost, easy to implement, sustainable packages which can solve their basic problems; vi) Technocrats and policy makers should unlearn what they have learnt in the universities, and start a process of re-learning. They must realize that the textbooks prescribed in the universities and colleges have no link with ground reality.

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