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The virtuous cycle

With the Covid-19 curve seemingly well on course to flattening it is but natural for the PTI-led coalition government of Prime Minister Imran Khan to walk the talk with visible confidence. A new spring in its steps. More so because this is happening in Pakistan at a time when a more advanced neighbour, India, has reported nearly 64,000 new cases only on last Thursday. India now has nearly 2.5 million total cases, with more than 47,000 deaths.

On the other hand, in Pakistan, accordng to the Wall Street Journal, once overflowing coronavirus wards are emptying. Why? It is a bit of a mystery, admits WSJ as Pakistan is testing just 9,964 people per million—half of India’s rate: “One reason could be that Pakistan has a young population, even by South Asian standards, as only 4 percent of its population is older than 65, and the average age is 22. Furthermore, there are no bars or nightclubs, very few homes for the elderly—all sites of increased transmission in other countries—and women tend to stay home.”

Meanwhile, It is reassuring to know that the government’s energy policy is on the anvil for drastic reforms aiming to reduce its cost,enhance its availability and smooth out its transmission and distribution glitches. The reforms are also expected to decrease the share of fossil fuel in the energy mix increasing significantly that of renewable energy—solar, wind and hydel.

As a first major step towards achieving these objectives, the government has signed a basic agreement (MoU) with Independent Power Producers (IPPs).The MoU is expected to take between one and two years to devise a new power purchase regime.

What, however, is a matter of serious concern is the economic data depicting the current state of the economy does not make a happy reading. The trade deficit is no more in the red, but the balance of payments position continues to be too off the mark. Fiscal deficit also continues to be too far on the wrong side of the fence. The rate of inflation is getting out of hand, threatening both the discount as well as the exchange rates.

Meanwhile, economic activity in the South Asia region where Pakistan is located is projected to contract by 2.7% in 2020 as pandemic mitigation measures hinder consumption and services activity and as uncertainty about the course of the pandemic chills private investment.

And according to Daniel Gerszon Mahler, Christoph Lakner, R. Andres Castaneda Aguilar and Haoyu Wu (Updated estimates of the impact of COVID-19 on global poverty— June 8, 2020: WB newsletter) since April, the epicenter of the pandemic has shifted from Europe and North America to the global south.

Under the baseline scenario the authors estimate that COVID-19 will push 71 million into extreme poverty, measured at the international poverty line of $1.90 per day. With the downside scenario, this increases to 100 million. Of the 176 million people expected to be pushed into poverty at the $3.20 poverty line under the baseline scenario, two-thirds are in the region in which we live in.

Speaking candidly, as long as we continue to adhere to the economic model that is based on the Washington Consensus and is steeped in the unregulated Free Market Economy mantra, Pakistan is likely to continue to remain dole dependent, retaining little or no sovereignty over its economy.

As a first step towards developing a new, dynamic and self- driving economic model our real rulers need to get out of their centrist fixation and accept the principles of federation.

The federating units cannot to be treated as subordinate to the federal governement because it were these very units that had, in the first place, created the federation; they are not the creatures of the federation.

The principles of federalism allow the federal part of the government to function within its constitutionally fixed fiscal and monetary limits while carying out its responsibilities restricted to subjects voluntarily conceded to it by the federating units while retaining their respective responsibilities listed in the 18th amendment.

The major crux of the 18th amendment with regard to political autonomy was the devolution of 17 ministries, including those of education, food, agriculture and health, from the centre to the provinces, allowing the provinces to formulate policies and projects in these spheres in their domain. The Council of Common Interests (CII) was also formed to allow provinces to coordinate in matters like public health and education.

Roughly speaking, if the 18th amendment is implemented in its true letter and spirit, the federal government will have no more than four portfolios to look after — finance, foreign affairs, defence and communication.

The provinces, on the other hand, would need to take care of development, law and order, agriculture, commerce and industry. And the local governments would be left with the task of taking care of school education, health and drinking water, etc.

Paradoxically, however, since the seventh NFC Award, finalized in 2009, the federal government, which continues to remain as elaborate as it was before the 18th amendment, has been trying but failing badly to make the two ends meet with the meagre residual resources available to it from the divisible pool.

From the core ministries, an estimated 40,000 people are to be transferred to the provinces and if the staff from related bodies is also included, the number is estimated to reach millions. The federal government has already announced that none of the employees not wanting to move to the provinces from these ministries will be sacked or put in the central pool.

A firm decision in this regard needs to be taken through the budgetary proposals and minimized the federal governement’s fiscal burdens made even heavier by the subsidies from the national exchequer to PEPCO, the Railways, the Pakistan Steel Mills, PIA, etc.

Currently, we are following an economically farcical practice of allocating twice for the same task—once at the level of federal governement and the other at the provincial level.

We, therefore, need to develop a socio-economic framework on which to subsequently build a truly social-welfare state by expanding the public sector to cover health, education, transport and housing catering exclusively to the most vulnerable part of the population which is estimated to be around 20% of the total.

Since the income from all the known sources continue to be too insufficient we need to come up with some out of the box ideas for mobilizing additional unecumbered resources to finance the huge outlays required for taking up in the public sector the proposed responsibilities.

Here is one such idea proposed via six short twitter messages by the world renowned economist Atif Mian for overcoming our chronic shortage of resources.

Atif Mian rejects the idea that growth requires capital and claims that growth creates capital and not the other way round. Explaining, he says almost always the constraints societies face have to do with organization, management, trust, rule of law, experimentations, institutions and innovations.

“As an example let us take a sector that is relevant to every country in the world, agriculture. Consider a country that is producing 50 cents per inch of land when its neighbor is producing 1$. Often the way to move from 50 to 52 then 55 and so on is to improve things like water management, for example making sure upstream does not waste water, rain water is collected and so on. There are numerous examples—-they require coordination, organization, research (experiments) and so on…and only little capital that every economy essentially has. So once you improve these margins and earn the extra 2 cents per inch and so on, these extra cents now start generating surplus that can be ploughed back as capital or investment. This is the virtuous cycle that we call growth-especially for poor countries. Poor countries don’t need to beg the rich—they have within them everything they need. The most important ingredient, or requirement, for growth is productivity. If productivity rises firms and individuals create larger surpluses that they can then deploy as capital, or investment or even greater output.This is the bottomline to keep in mind.”

M Ziauddin, "The virtuous cycle," Business Recorder. 2020-08-19.
Keywords: Economics , Pakistan Steel Mills , Economic data , Economic growth , Market economy , Economic framework , Daniel Gerszon Mahler , Christoph Lakner , R. Andres Castaneda Aguilar , Pakistan , CII , PIA , PEPCO

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