Austerity Pakistan 3: An Economy of Shortages
Austerity Pakistan 3
An Economy of Shortages!
Austerity
economics that has prevailed in Pakistan has created an economy of
shortages and is choking growth and employment. This is not a matter
of well thought out policy but an outcome of inertia in thought and
analysis in government, and an inability in our economic profession
to keep up with global knowledge. Let me show you what I mean.
Fiscal Arithmetic
Austerity
economics has been struggling with the objective of bringing our
growing fiscal deficits under control. This approach has been caught
up in what I call fiscal arithmetic. These analysts see the
budget only as expenditures minus taxation and hence the solution is
simple: increase taxes no matter how and reduce expenditures no
matter how. Ambitious targets are set with arbitrary taxes
(Surcharges, one time levies, excises of all kinds) and expenditure
cuts with no thought for impact on the economy (Salary freezes,
across the board cuts). The only thing that matters to the proponents
of fiscal arithmetic is the dream of reaching a deficit number of 4%
of GDP. If this happens with 25% increase in taxes and 20% cut in
expenditures, that is fine. Quick and ill-thought out measures are
cited to support these cuts. The impact of these measures on economic
growth, productivity and employment does not concern the proponents
of fiscal arithmetic.
Examine the
austerity measures that the Finance Ministry (MOF) proudly proclaimed
as an achievement in the last few years. The claim was that all now
wage expenditures are not being allowed to grow. In fact MOF was
trying to cut such expenditures in real terms they were being cut.
MOF was also
caught in a strange dance with the Ministry of Water and Power (W&P)
where the former would not pay the full bill of the power sector and
the latter lacked the wherewithal to repair the sector. A classic
standoff where egoes were at work! MOF thought that mere withholding
money would force W&P to solve the problem. The latter knew that
enough load shedding would force the hand of MOF. Hence the vicious
cycle of load-shedding and circular debt buildup and eventual payoff
and once again load-shedding and circular debt.....
This vicious cycle
cost the economy a loss of 2-3% on our annual growth rate. Rough
estimates would suggest that about 800,000 jobs were lost. No effort
was made to understand either the nature of the problem or to address
the human and the organizational capital in the power sector. The
nation lost in this strategic playoff between 2 large ministries (MOF
and W&P) with large egoes and desire for power grabs.
Our energy
shortage is partly artificial caused by fiscal arithmetic and partly
by a bureaucratic system that lacks capacity and the ability to
manage complex systems such as energy.
How easy is it to cut expenditures
and what do expenditure cuts mean?
Government incurs
expenditures to provide certain public services. In providing those
services, governments employ people, develop some assets and agree by
policy to provide some activities or groups some subsidies. None of
these expenditures can be cut overnight. Cutting wages of the public
sector workers and the monies required for maintaining assets that
have been created could be counterproductive in the long run as the
resulting depletion of human capital and assets will have lasting
adverse consequence for economic growth and employment.
Reducing and
managing government expenditures must be a carefully done to not
erode public governance and policy-making capital as well as to
prevent deterioration in public infrastructure assets (such as roads,
railways, stadiums, libraries, public spaces etc).
Distorting the
incentives of public sector workers who are critical for good
governance and good policy through arbitrary expenditure cuts such as
wage restraints is not a good idea. When this happened in the past
the public sector workers reacted with setting up a plethora of perks
and plots as non wage payoffs to themselves. These perks and plots
are not only protected from expenditure cuts but as noted in the
Framework For Economic Growth they also severely reduce investment in
the urban sector. Mere fiscal arithmetic will not capture the
intricacy of incentives and economic gamesmanship of bureaucracy.
Most analysts
would agree that without a bureaucratic reform, governance will
remain flawed, corruption will not be corrected and policy will be
poorly made. However reform will require expenditure increase since
monetizing perks/plots and giving market relative salaries costs. Yet
fiscal arithmetic will stop us from making a reform that has a large
payoff in governance improvement and a huge payoff in terms of an
investment boom. A Planning Commission study showed that monetizing
housing in Islamabad alone would create an investment potential of
Rs.10 trillion.
Depreciating Assets
Fiscal arithmetic
also talks of across the board cuts since it is too painstaking to
pinpoint where cuts should be made. Time is better spent maximizing
perks.
Over the years,
public sector worker pressure has forced a wage rate increase for
them. Under pressure of fiscal arithmetic, the government put in a
policy of freezing non-wage expenditures--a policy that was much
appreciated by donors.
This meant that an
already flawed public service incentive system was rewarded while
working capital in government was sharply reduced. Needless to say
public service delivery declined as schools were unable to afford
books, hospitals medicines and police the tools for their work.
Cash-short systems
postpone much needed maintenance of critical assets such as railways,
transmission lines, roads, generation companies. Asset depletion
adversely affects productivity, long term growth as well as public
service delivery. No wonder that our public sector assets (railways,
Energy etc) are performing so poorly not having been maintained
properly for years and being run by people least interested in
productivity (more worried about perks).
Social infrastructure killed off
4 decades ago,
Pakistan was developing a system of libraries/community centers
called first Bureau of National Reconstruction and later Pakistan
National Centers, There was also an attempt to start making movies
and educate people on this medium through a National Film Development
Corporation. Needless to say these were the first entities that were
cut when fiscal arithmetic set in.
Yet the Framework
of Economic growth of the Planning Commission argues (following
considerable global experience) that for growth such elements of
social infrastructure impact long term development of society and
hence productivity. But with austerity this would be almost
unthinkable. Meanwhile Pakistan society fragments; all global
measures of trust and social capital show sharp declines in Pakistan.
And generations are growing without libraries when books are very
expensive.
How to cut
expenditures
Durable cuts in
expenditure can only be made through painstaking and detailed reform
efforts that ensure quality public service delivery, increasing
public sector productivity, improving governance, and well
deliberated system of regulation that fosters growth and development.
This will only happen through a competent and credible reform system
that recruits and motivates professionals into public service and
arms them with adequate resources to build assets. While the focus of
a public governance system is public service delivery, it must always
remain deliberative and thoughtful on the fine balance between the
state and market for a growing economy.
This is a tall
order and requires patient work and will not happen through quick
cuts of fiscal arithmetic.
Fiscal policy is
not mere arithmetic but a careful and detailed understanding of the
role of government and how best to deliver it. Changes in expenditure
and revenue policy must be based on serious reform with adequate
time to implement if they are to be durable and if they are expected
to happen with improved public service delivery and growth and
development. This means moving away from fiscal arithmetic and an
austerity focus.
Our policy focus
must be growth. Prudent economic management for durable economic
growth will force fiscal policy towards stability.
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