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Stimulus and institutional reform

Unlike many budgets in the past, the Budget 2021/22 places strong emphasis on providing stimulus for economic growth, and significantly focuses that stimulus towards people in the lower echelons of income ladder. The government says that the stimulus holds the promise of greater and much-needed growth, and that channelling larger amounts of funds towards people in the lower income bracket, announces as one of the first major steps of a ‘bottoms-up’ approach, unlike the ‘trickle down’ one practiced over many decades gone by.

Having said that, lack of institutional, organizational, and market reforms, and without government working in a mission-oriented, purpose-driven, entrepreneurial way, stimulus will most likely not help achieve growth with equity, and sustainability, nor will those at the bottom of the income ladder, and receiving a significant portion of this stimulus be able to stand on a solid income-generating platform from which to propel themselves out of the vicious cycle of poverty.

And unless income inequality and poverty are drastically reduced, and which have increased under an over-stabilizing IMF (International Monetary Fund) programme and recession-causing pandemic, the quality of democracy is also likely to suffer, with demos struggling to gain enough economic independence, and time for needed thinking on wider political issues, along with generating enough economic capacity to create time for practicing greater activism on important political and economic issues to put political parties in government and otherwise under greater scrutiny with regard to the efforts towards bringing needed reforms. As it stands, years of increasing inequality and poverty have led to greater disenfranchisement of demos over public policy, including the rising role of money that the collusion of the politico-economic elites has successfully produced over time through perpetuating extractive institutional design for taking advantage of the economic misery of demos, and in turn strongly influencing votes in their favour on the back of offering petty gains to voters.

Budget, if it really wishes to bring the needed efficiency of stimulus to put the ‘bottoms-up’ approach on strong and sustainable footing, and if it desires to improve the quality of growth towards reaching goals such as reduced income inequality and poverty, diminishing of climate change crisis, and ensuring overall wellbeing and better quality democracy – which will bring needed economic and political sustainability and meaningful progress – will in turn need to spend money in building the capability of public institutions or ministries/departments in provinces with full decision-making authority after the 18th Constitutional amendment, to act as an entrepreneurial government, which in turn engages better with the private sector, and by providing governance and incentive structures that enable organizations – including SOEs (state-owned enterprises) – and markets to function in a way that helps allow a ‘bottoms-up’ approach, and sustainable macroeconomic stabilization and economic growth.

Sadly, this Budget while provides stimulus, does so mostly to the people, but not for improving the economic environment – a non-neoliberal government armed by the capacity to properly negotiate contracts with the private sector in economic areas/entities of non-strategic importance, and in ensuring needed institutional reforms that will ultimately determine the extent to which people can usefully employ those resources to get on a sustained income-generating path. It will be very difficult to nurture the plants or agents of economy through the fertilizer of stimulus, but at the same time having to patch a thousand cuts on the economy in a random, fire-fighting kind of way, and then to expect that the stimulus being provided as one source, and without improving the overall quality of soil in the shape of meaningful institutional reform, will allow the plant to grow to optimal size; which is indeed very unlikely.

The government wants to paint this Budget as a ‘structural break’ from the past, in terms of shifting from ‘trickle-down’ economics to the ‘bottoms-up’ approach, but stimulus alone will not work because dismantling of the former requires a break from the Washington-consensus, neoliberal policy package of mostly unfettered markets, and government is seen as only a fixer of market failure and a facilitator of private sector. While decision to make that shift should come from a clear-headed political and economic leadership which either appears reluctant or strangely does not properly understand the depth of negative consequences of Neoliberalism, to make that move, resources in the Budget should move towards funding research hubs that have the willingness and capacity to make detailed and innovative policy plans – at both federal and provincial levels – to make that non-neoliberal structural shift happen.

Mere drum-beating by government that it has created a break from the past, when actually it has not, and extractive institutional design or elite capture is still very much there, which may appease for some time the immensely under-nourished demos in terms of, for instance, health, education, and who have little time to raise their heads over the daily bread-earning engagements of mostly making ends meet with great difficulty. And in the absence of real break from trickle-down and elite capture, the stimulus will mostly not allow people who make use of loans with low interest rates, or even without interest payments, to get on a sustainable income-generating path, which, God forbid, may even make it difficult for people to even pay back principal amount of loans. Given this context, high probability remains that they will be finding themselves more vulnerable than before.

At the same time, IMF’s neoliberal-styled programme framework needs a strong revisit away from this, and only then can it help programme countries, like Pakistan, in moving towards equitable and sustainable macroeconomic stability, and economic growth.

(The writer holds a PhD in Economics from the University of Barcelona; he previously worked at the International Monetary Fund)

Dr Omer Javed, "Stimulus and institutional reform," . 2021-06-18.
Keywords: Business Recorder , Federal budget , Economic growth , Economic independence , Economic issues , Economic elites , Economic leadership , IMF , SOE

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