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Growth with equity: a fine balance

If the benefits of economic growth are not widely shared, people become resentful. Tensions arise, societal tectonic plates shift, social bonds fray and a day comes when the volcano erupts. This is what happened in the case of the Arab Spring.

The Occupy movement was another manifestation of the tensions brewing in the west due to crony capitalism and inequitable growth for decades. However, thanks to such protests, a process of rethinking has rekindled the interest of academics and economic policymakers in concepts like growth with equity, inequality, inclusive growth, and pro-poor policies which have come to be at the centre of policy debates.

The idea of growth with equity has now gone global. Multilateral donors and international organisations like the UN are advocating this concept with greater fanfare than was the case in the past. The meeting of the Commonwealth heads of governments held last month at Colombo is a case in point. The meeting’s theme was growth with equity, which at least confirms the increasing interest and importance of the concept at the global level. Economic growth per se, as has been advocated by economists since long, is now seriously under question. The argument that ‘you take care of growth and growth will take care of you’ is fast losing universal appeal among economists and policymakers.

Economic growth, though a necessary condition for development, is not sufficient if it is not equitable. For example, Tunisia, the starting point of the Arab Spring, has been long considered by International Financial Institutions (IFIs) as one of the best performers in terms of macroeconomic stability and economic competitiveness. Its public debt ratio stood at around 43 percent of the GDP, similar to other economies such as Turkey and Argentina.

Economic growth had averaged five percent per annum since 1990 and it was rated as the best in terms of economic competitiveness in all of Africa. But competiveness and good economic indicators masked a pattern of growth that was inequitable in nature and ultimately the lid hiding the social unrest resulting from inequitable growth was lifted with the self-immolation of a young man, triggering upheavals.

Why is growth alone not sufficient? After all when economic growth catches on, the broad segment of society is likely to benefit from the increased size of the cake. But the problem here is that structural rigidities do not let the market work for the poor and the disadvantaged. The poor are shut out of the process by poor health facilities, lack of education, limited access to credit and savings, and other rigidities due to imperfect markets. In such a situation, the key question relates to striking a balance between growth and equity and working out policies to ensure that the fruits of growth are widely shared among all segments of society.

The first market imperfection, especially with reference to developing countries like Pakistan, is the market for credit. It is a known fact that there is a wide gap between what is paid by the lender and what is paid to the depositors. Credit access and interest rate charged depend on a number of factors. For example, credit access will be easy for those with some type of collateral.

The rate of interest is not the same for all creditors. It may be low for big businesses but very high for informal businesses. In rural areas, it generally tends to be far higher if the loan is taken from informal money lenders. It has also been found that access to credit and interest rate charged in developing countries depends on social status as well. The role of political power and connections to secure such loans is also well documented.

Pakistan represents the most pertinent example of how loans were obtained by the politically influential and well-connected people, and how large chunks of such loans were written off using political influence. On the other hand, there are instances where non-payment of agricultural loan of just a few thousand rupees has landed the defaulters into jail. So the point here is that credit markets in developing countries like Pakistan are far from perfect.

The second market imperfection relates to savings. Due to the absence of formal financial institutions in the rural areas where a majority of the poor reside, there is always risk of fly-by-night operators absconding with the savings of the poor. Very few households have savings accounts, especially in the rural areas. According to Professor Esther Duflo of MIT, lack of savings accounts has serious implications for the poor. For example, it is difficult for them to even small amounts which they can use to purchase household durables like TV, fridge or to pay school fees.

Further, imperfect credit markets mean that the poor are constrained to exploit growth opportunities by setting up new businesses in the productive sectors. The market imperfection also works against them in an indirect way by rendering them unable to take advantage of growth and offer their savings to banks that can take care of the intermediation and lend their money to those with sufficient collateral.

The third market imperfection relates to the land market. The ideal land market is one where you can sell and buy land of your own volition. This requires that land titles are not disputed and property rights are clearly defined. But such is not the case in developing countries like Pakistan where property rights are not well enforced. Uncertainty in enforcement of property rights means that land remains dead capital. The poor and the underprivileged may own small land holdings or small houses but are unable to use it as productive capital due to unclear titles.

Similarly acute market imperfections exist in insurance and human resource markets. The point being contended here is that growth per se cannot eliminate poverty, bridge class divide and inequality unless it is inclusive in nature. This brings us to identifying factors that can help make it equitable for all segments of society, particularly the poor.

The first relates to rethinking and reviewing the role of market forces in generating demand and supply of economic goods. The financial crunch, which affected global economic architecture and caused layoffs worldwide at a massive scale, brought this message home in no uncertain terms that markets alone, driven by profit maximisation, were structurally unable to take care of the poor and downtrodden. Hence, the state cannot leave the entire economic activity to them; it clearly has a role to protect the economically vulnerable sections of society.

That does not mean that the state should tinker with the sources of growth or that bureaucrats should be in business or the state should essentially have a larger footprint. Rather it means that it should formulate policies that allow the poor access to the opportunities generated by economic growth. That essentially requires correcting imperfect markets through better regulation and enforcement.

Therefore, in order to make growth equitable, the state has to move fast to rein in imperfect markets and empower the common person to enable him/her to take advantage of economic growth. It needs to fix credit, savings, and insurance markets. The state must increase the access of the poor to credit and savings institutions.

Further, providing people with access to quality education and healthcare by making more public investments in the social sector will help reduce imperfections in the market for human capital by making people employable – since gainful employment is an important route for balancing growth with equity.

The writer is a graduate of Columbia University.  Email: jamilnasir1969@gmail.com

Jamil Nasir, "Growth with equity: a fine balance," The News. 2013-12-19.
Keywords: Economics , Economic needs , Economic growth , Policy making , Economic policy , Economic development , Interest rate , Macroeconomics , Pakistan , Africa , Turkey , MIT , IFIs , GDP